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A guide to helping you understand business loan personal guarantees
What exactly is a personal guarantee?
A significant number of businesses are asked to provide personal guarantees on unsecured business loans, however the term can cause some confusion. If you are thinking about applying for business finance, you are likely to have heard the term ‘personal guarantee’.
It is important to ensure that you completely understand personal guarantees when applying for a loan, as they could impact the company directors or major shareholders personal finances. The term can sound daunting so to help you decide whether a personal guarantee is the right option for you, we will take you through what they are and their financial impact on both you and your business.
Why do some loans require a personal guarantee?
You may be asked to provide a personal guarantee in a variety of business finance situations, from loan applications to utilising invoice financing. If a business director or shareholder provides a personal guarantee, they will become personally liable if the business then defaults on the credit repayments.
Although their main purpose is to minimise the lenders risk, personal guarantees by directors will also show that you are confident the business will be able to repay the loan. In many situations providing a personal guarantee could be the thing which ensures your loan application is accepted, although it is possible to find a business loan without a personal guarantee.
How does a personal guarantee work?
If you default on a business loan with a personal guarantee the lender will stop pursuing the business for the debt, instead they will use the directors guarantee to recoup any missed payments through you personally.
It is important to remember that personal guarantees on business loans will only affect you if the business defaults on the repayments. There are a variety of personal guarantee options, which will usually be dictated by the amount to be borrowed, credit rating, business assets and your overall net worth.
Key features of a personal guarantee
The first aspect to consider is whether the personal guarantee is providing an indemnity, which will obligate you to pay any loss or damages to the lender. The second aspect to understand is that some lenders will require personal guarantee to provide security over your assets, although in general they will usually be based on your overall finances and net worth. If the personal guarantee covers your assets, your home and any other physical assets could be at risk if the loan falls into areas.
By providing a guarantee which secures assets such as your home, it will be easier for the lender to seek missed repayments if the business defaults so your chances of being accepted are higher. If you are asked to provide a personal guarantee, take a close look through the contract as you may be required to act as a guarantor, indemnifier or a combination of the two.
It may be possible to cap your personal guarantee liabilities when the loan is being drafted, which could mitigate your potential loss. Before agreeing to provide a personal guarantee consider how comfortable you are with the terms offered, such as what the lender classes as a default and how they will enforce the guarantee.
Should I take out a loan which asks for a personal guarantee?
Providing a personal guarantee on a commercial loan, could improve your chances of accessing the finance your business needs. If a lender decides that your business may not be able to meet repayments on its own, the personal guarantee could provide the additional reassurance the lender requires to provide you the finance.
Whether you are looking to raise capital to expand your business or are just starting out and have no trading history, in some situations it can be difficult to find an unsecured business loan. However, the funds which you need to continue the business could be available if you have the personal assets required to provide security over the business credit.
Your obligation to personally cover the loan repayments is secondary to the agreement between the lender and your business, so as long as the repayments are met you will not be in a position to personally repay the debt.
However, there are no guarantees that the business will trade at the level you expect, and the loan could fall into default. If the business does become insolvent, there can be personal financial difficulties and the potential for bankruptcy, if outstanding debts are covered by a personal guarantee.
If your business finds itself in financial difficulty and you default on personally guaranteed business loans you own assets could be at risk. Although, if you are confident in the business and its ability to repay the loan, a personal guarantee could provide the injection of funds needed to grow the company.
Fortunately, in some situations it is possible to take out personal guarantee insurance to reduce the risk. The lender will be able to provide you with details of any insurance available to cover your guarantee, although third-party insurers are also available.
Are there loans available which do not require a personal guarantee?
In general, business lines of credit without a personal guarantee will usually be secured against assets which the business owns, such as property, stock or machinery. If you are searching for an unsecured business loan without a personal guarantee it could be difficult to find a lender, unless you have an excellent credit rating and financial history.
Depending on the loan amount and level of risk there are unsecured business loans with no personal guarantee available, however the interest rate is likely to be higher and the loan amount offered could be less than you require.
We work with a variety of lenders from high street banks specialising in traditional secured loans, to peer to peer lenders which provide alternative forms of finance. There are a growing number of funding options available for businesses, which could provide the finance you require without a personal guarantee.
Our lenders can provide a service which is specifically tailored to the needs of small businesses, which are not able to meet the terms required by traditional providers of business loans.
Try our business loan comparison tool
Our unique business loan comparison tool will help you find out which loans are available to your business. By entering details such as the loan amount, annual turnover and repayment period, our tool will provide you with a list of reputable lenders which match your requirements.
Whether you are looking for a business loan with no personal guarantee, or a lender which asks for a personal guarantee on a commercial loan, our tool can connect you with the ideal solution. During the application process if a personal guarantee is required you will need to provide details of your own credit history, personal assets and financial situation, in addition to the business information required.
If you are asked to provide a personal guarantee the aim should be to establish what your obligations are and what their impact could mean to your personal finances. Whatever your situation, we can provide impartial advice and a simple route to accessing the loan which your business requires.
To find out more about personal guaranteed loans and the options available to your business, please contact our team today.
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