Director’s guarantees are a common feature in large business loans – usually if the company doesn’t have an asset to offer as security.
That can be a stumbling block because many business owners aren’t keen on staking their personal assets on an overdraft – but may feel they need to or offer collateral in the form of machinery, property or equipment they haven’t yet finished paying for.
This guide explains why lenders ask for a director’s personal guarantee, what they mean, and everything you should know before signing.
What is a Personal Guarantee on a Business Loan?
If you apply for a business loan and provide a personal guarantee, you aren’t linking the debt to a specific asset.
Instead, you are legally committing to paying back the loan balance if the company defaults.
That means you assume personal responsibility for the business debts, which shouldn’t be a problem provided the business never falls behind – you’d only be called on as a guarantor in a non-payment situation.
What Are the Differences Between Business Loan Personal Guarantees?
Personal guarantees are commonly used by businesses that either don’t have any security available or have credit scoring issues, which means the debt would otherwise be too high a risk for the lender.
If the business is making good profits, a guarantee is a way to access the capital you need to expand and is typical for organizations turned down by a mainstream bank.
There are differences between guarantees, and you must know what the terms mean.
Unlimited Personal Guarantees
Unlimited personal guarantees are also called indemnity guarantees or might apply to a secured loan product.
The director is taking on significant risk, and the lender could potentially recover 100% of the debt, plus legal charges and recovery fees.
Limited Personal Guarantees
An unsecured or limited personal guarantee still means you’re committing to pay back business debt if anything goes wrong, but your exposure isn’t to the full value of the loan.
For example, business partners might split responsibility 50/50.
Which Are the Best Lenders to Find Unsecured Business Lending?
Directors and owners in need of financing often turn to their regular high street bank and find they are turned down for a loan due to a lack of security.
Conventional banks are often less attractive because the charges on business lending tend to be higher than through specialist providers, and the requirements are often stricter.
There are hundreds of alternative business lenders, normally with less red tape and faster turnarounds (you can even get financing in 24 hours).
Any loan you take on should be financially viable, and the business should have the means to keep up with the payments – but business failures happen, and sometimes there is little you can do to prevent it.
Lenders, therefore, ask for personal guarantees because they aren’t taking on as much risk that if the business fails, they’ll end up out of pocket.
What Does a Director’s Personal Guarantee Against a Business Loan Mean Legally?
A personal guarantee is a personal risk, and you are legally giving the lender the right to repossess your private assets – including savings, property and investments.
In the worst-case scenario, you might need to relinquish a car, home, or even furniture if the business can’t pay the debt.
Directors in this situation can end up in bankruptcy, resulting in long-term financial issues and a detrimental impact on their credit score – a court might rule a director unfit, and mean they cannot act as a director in the future.
Personal guarantees are legally enforceable from the date they are signed, so please seek professional advice to ensure any loan you take on is suitable.
Are There Alternatives to Signing a Personal Director’s Guarantee to Get a Business Loan?
Business owners who need financing but are reluctant to sign a personal guarantee can consider several other lending products, such as a merchant cash advance.
Just one of many alternatives, a merchant cash advance involves the lender paying a lump sum upfront, based on average sales through credit or debit card transactions.
The advantage is that the collateral is the projected sales, so directors won’t normally need to sign a personal guarantee.
Should I Sign a Personal Guarantee to Get a Business Loan?
It’s natural to be hesitant if you’re considering signing a guarantee that could be massively problematic if the business fails – so you should do everything possible to ensure the company can afford the debt.
Some unsecured loans have unacceptable requirements, whereas others are fair, so you should always know what each part of the contract means, particularly if you’re asked to sign an unlimited personal guarantee.
Never enter into a loan agreement without an independent opinion, and do your homework before you sign a contract that puts your personal assets at risk.