What is a personal guarantee on a business loan?

If your business doesn’t qualify for funding on its own, you may need to provide a personal guarantee to assure lenders they’ll get their money back if your business can’t repay.

But of the 78% of directors who were asked to provide a personal guarantee when applying for finance, 24% of them decided not to take the finance at all, likely due to the risk of losing personal assets.

If you’re on the fence about signing one, understanding the ins and outs can help you make the right call for your business.

In this article, we’ll explain what personal guarantees are, how they work, how they can benefit your business and the potential risks involved.

Key points:

• A personal guarantee helps you access funding when your business might not qualify on its own

• If your business can’t repay its loan, you’ll be responsible for covering the debt from your personal finances

• Funding Options by Tide can help you secure the right business funding quickly and easily, matching you with lenders that offer a personal guarantee

What is a personal guarantee?

A personal guarantee is a legally binding agreement where you promise to repay a business loan if your company can’t. For lenders, it’s a way of reducing their risk by holding you personally responsible for the debt.

When you sign a personal guarantee, you’re acting as the guarantor for your business. So if your company misses repayments or defaults on the loan, the lender can come to you to cover the outstanding amount.

How does a personal guarantee on a business loan work?

A personal guarantee is a separate contract between you and the lender that runs alongside your company’s loan agreement.

Your business is the main borrower but you act as the fallback. This could mean covering the full debt or just a capped portion (like 20% of the loan), depending on what’s been agreed.

Often, the guarantee includes an indemnity clause, which means you’ll also be responsible for any extra costs the lender faces if things go wrong.

When you apply for a loan, the lender will assess the risk and decide whether they need a guarantee – and if so, how much for.

They’ll usually ask for a personal guarantee when a limited company doesn’t have many assets, is relatively new, or is taking out an unsecured business loan. This isn’t usually needed for sole traders or partnerships, since the business debts are already tied to the owner by law.

If a personal guarantee is required, you’ll have to sign a separate document to make it official, often after getting independent legal advice.

Once the loan’s up and running, the guarantee stays in the background as long as repayments are made on time. But if there’s an issue making repayments, the lender can enforce it.

They’ll typically chase the company first, but if payments keep being missed or the business becomes insolvent, they can demand the money from you personally. This could mean court action, claims against your assets, or even bankruptcy proceedings if the debt isn’t settled.

An important thing to remember is that a personal guarantee doesn’t disappear if a business closes, and you’ll still be liable for the remaining debt.

Are there different types of personal guarantee?

Depending on the lender’s requirements and your agreement, you may encounter different types of personal guarantee.

• Unlimited personal guarantee: You (the guarantor) are fully liable for the entire debt, including interest, fees, and any additional costs. This type carries the highest personal risk, as there’s no upper limit on what you might have to pay.

• Limited personal guarantee: Your liability is capped at a specific amount (e.g. £50,000 on a loan of £250,000). This reduces your financial exposure compared to an unlimited guarantee.

• Joint and several guarantees: Multiple guarantors (e.g. business directors) share responsibility for the debt. But the lender can pursue any one guarantor for the full amount if the others can’t pay. So even if you’re one of three guarantors, you could still be held liable for the entire debt if the others default.

What are the benefits of personal guarantees?

• Increased chances of getting approved: Lenders see personal guarantees as extra security, which can make them more likely to approve your application.

• More accessible loans for start ups and small businesses: If your business has limited credit history or assets, a personal guarantee could help you access funding that might otherwise be out of reach.

• Potentially better loan terms: With less risk for the lender, you might secure lower interest rates or borrow a larger amount than you would without one.

• Business growth: Access to finance means you can invest in new opportunities, hire staff, or expand without having to risk business assets as collateral.

What are the disadvantages of personal guarantees?

• Puts your personal assets at risk: If your business can’t repay the loan, your home, car, savings or investments could be on the line, potentially forcing sales or financial hardship.

• Can harm your credit score: Defaulting on the guarantee may damage your personal credit rating, making it harder to borrow in the future for things like mortgages or personal loans.

• Could lead to bankruptcy: If your assets don’t cover the debt, you might face personal bankruptcy, which comes with long-term consequences like restrictions on being a company director.

• Could cause stress and long-term liability: The responsibility doesn’t always disappear if your business closes or becomes insolvent, leaving you with ongoing financial and emotional pressure.

Who can be a business loan guarantor?

Not everyone can act as a guarantor for a business loan. Lenders look for people or organisations with the financial ability to cover the debt if your business can’t. Business loan guarantors can include:

• Business owners or directors: If you’re a director, shareholder, or partner in the business, lenders will often expect you to step up as guarantor.

• Family or close contacts: Spouses, parents, or long-term friends can act as guarantors, but they’ll need a strong credit history and proof they can afford the risk.

• UK residents over 21: Most lenders require guarantors to be at least 21 (some accept 18+), with a stable income or assets to back up the guarantee.

• Other UK-based businesses: A separate limited company with solid finances may also guarantee the loan, as long as they meet lender checks.

• Multiple guarantors: Lenders may allow more than one person to guarantee the loan, allowing them to pursue any of them for the full amount if needed.

What are the alternatives to a personal guarantee?

If you’d rather not provide a personal guarantee, there are other ways to fund your business. Here are some of the most common options:

• Government-backed Start Up Loans: Borrow up to £25,000 at a fixed 6% interest rate, with no personal guarantee or collateral required. This might be suitable if your business is under 36 months old and has a strong plan.

• Unsecured business loans: Some lenders offer loans from £1,000 to £500,000 without needing a guarantee, but you’ll usually need at least 1-2 years of trading history. Interest rates tend to be higher, but your personal assets stay protected.

• Secured business loans: With these, you can use business assets like property, equipment, or vehicles as collateral instead of a personal guarantee. This can work well if your business has valuable assets but you’d rather not risk your own finances.

• Asset or equipment finance: Lease or buy equipment through hire-purchase agreements without tying yourself personally to the debt. Can be suitable if you need machinery or tech but don’t have a long trading history.

• Invoice finance: Get up to 90% of the value of unpaid invoices upfront, using customer invoices as security. Often a good fit for B2B businesses with reliable clients but uneven cash flow.

• Grants and crowdfunding: Access non-repayable funds through government schemes or crowdfunding platforms (some may require you to give up equity). Competition is high, and it takes effort, but it could be worth exploring if you’ve got an innovative idea.

• Merchant cash advances or business credit cards: Get funding quickly based on your card sales or revenue, without having to provide a personal guarantee. Just look out for higher costs, particularly if your cash flow is unpredictable.

Secure the financing you need with Funding Options by Tide

If you’re unsure about the risks of a personal guarantee or whether it’s the right choice for your business, Funding Options by Tide can help you explore different options.

With access to over 80 trusted lenders, we’ve already helped over 19,000 SMEs secure more than £1.1 billion in funding using a wide range of finance products. So whether you’re scaling up, adapting to new opportunities or challenges, or simply need to boost your working capital, we’ll guide you through the process of securing financing quickly and clearly so you can get back to focusing on your business.

Compare business loans through Funding Options by Tide.

FAQs

Do all business loans require a personal guarantee?

Not all of them. Secured loans (where you use business assets as collateral) often don’t need one, and some unsecured lenders, or government-backed schemes like the Start Up Loans programme, may not ask for one either.

What is personal guarantee insurance?

Personal guarantee insurance can cover part of your liability if a lender calls in the guarantee, but it won’t protect the full amount. The cost depends on the size of the guarantee and what’s secured against the loan.

What are the consequences of defaulting on a personal guarantee?

If your business can’t repay, the lender will require payment from you personally. If you don’t have the money to hand, this could result in seizing your assets, issuing a County Court Judgment (CCJ), damaging your credit score, or even forcing you into bankruptcy, with potential director disqualifications on top.

Does a personal guarantee need to be witnessed?

Yes, most lenders require it to be signed as a deed, which usually means a solicitor (or another independent witness) needs to confirm you’ve received legal advice and understand the risks.

At what point do you need to provide a personal guarantee on a business loan?

It typically comes up after your initial application, once the lender’s assessed your business. You’ll see it in the formal loan offer, just before you sign the final agreement and receive the funds.

Are personal guarantees and director’s loans the same thing?

No. A personal guarantee is your legal promise to repay a business debt if the company can’t, while a director’s loan is money you lend to – or borrow from – your own business, recorded in the company accounts.

Are personal guarantees and an indemnity the same thing?

Not quite. A personal guarantee means you’ll cover the debt if the business defaults, while an indemnity is a broader promise to compensate the lender for any losses tied to the loan, and is often included alongside a guarantee.

How long does a personal guarantee last?

It usually stays in place for the full term of the loan, even if you leave the business or the company closes. Some guarantees cover all current and future borrowing unless you negotiate a time limit or cap upfront.

Are personal guarantees enforceable?

Yes, they’re legally binding, provided they’re properly signed, witnessed (often as a deed), and you’ve had independent legal advice to confirm you understand the risks.

When is a personal guarantee considered unenforceable?

A court might rule a personal guarantee unenforceable if you signed under pressure, weren’t given clear legal advice, or the terms were unfair or ambiguous. The same applies if the lender changed the loan terms without your consent or the guarantee wasn’t executed correctly.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.