When trying to acquire funding for your company, you may be required to provide a personal guarantee against the loan. This is common with products such as business loans, asset finance, and invoice finance. A personal guarantee is a legally binding promise that you (a director or shareholder) commit to repaying any credit that you take out, in the case that the business becomes unable to pay it back.
Lenders use personal guarantees when the more preferable asset based security is unavailable. Unsecured Loans are by name not secured against an asset. For the lender's comfort of loaning out the funds, a contract stating that you are personally liable for paying back the entire agreed amount will be signed called a personal guarantee. This contract is legally binding, and gives the lender the ability to have peace of mind that their funds will be returned.
They are almost always involved in the conditions of an unsecured business loan, although other products work slightly differently. Secured loans also will come with a personal guarantee, although this is much less likely to come to fruition. This is because there is already security in place to cover any defaulted payments in the form of an asset, such as property. Invoice Finance products can come with personal guarantees, to ensure that the minimum payments are acquired by the lender. Invoice Finance products for those in the construction sector often come with a personal guarantee, although this is not a formality. Many Invoice Finance products are agreed without any personal guarantee involved.
A personal guarantee is a form of security. It is put in place to ensure that the lender will receive their agreed funds back in the case that the business defaults on their payments. If this is to happen, the lender can take ownership of the assets you have given as a personal guarantee, this could be property, vehicles, or plant.
This is part of the reason lenders will take personal credit checks against you, as they will need to be aware of your overall net worth. They may also check your credit history. With some products, lenders may only require a personal guarantee on a part of the funds. An example of this is the CBILS (coronavirus business interruption loan scheme) loan. This is a product made to relieve businesses from the COVID-19 pandemic, which includes no personal guarantees up to £250k.
For your own peace of mind, it is possible to insure your business against a personal guarantee collection. Insurance against personal guarantees can cover up to 80% of your claim, although this is dependent on the total being guaranteed, as well as the financial stability of the business, Please be aware we cannot offer any kind of insurance, although we can point you in the direction of someone who can help.