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Should I Sign a Personal Guarantee?

Businesses need funding – they need funding to grow and thrive, they need funding to buy new assets, they need funding to inject working capital into the business.
If you are a sole trader and borrowing in your own name, then you are personally liable for ensuring the business loan you have taken out is repaid.
However, if you operate your business as a limited company, it is wrong to assume that you don’t have any personal liability. This is because, most lenders and banks will ask for a personal guarantee (PG) from you as the business owner and director of the company.
The question is, therefore, should I sign a PG or not. The answer is, if you want the loan, you may not have a choice. That’s because, when lenders ask for a PG it is not an option, but rather a condition of getting the finance your business needs.
So, perhaps better questions are, what are the implications for signing a PG? And is it a good idea to sign one?
Let’s find out.
The first thing I would say is, think carefully before signing a personal guarantee and weigh up and understand what you are entering into.
Make sure you consider the individual circumstances of your business. You may be in a position where the business is growing, and you need funding to support that growth. If the lender providing the funding requires a PG, you may decide that ‘on-balance’ providing a PG to the lender and obtaining the funding you need will enable your business to grow and expand at a crucial stage. Therefore, providing a PG is an acceptable risk that you have weighed and considered.
Equally, you may decide that in fact you don’t want to provide a PG and would prefer to look at alternative ways of raising finance that doesn’t require a PG to be given.
But, before you can make a decision, you need to know what a personal guarantee is and what the pros and cons are.
This is because, research has shown that more than half (55 per cent) of SME business owners don’t actually know what a personal guarantee is.
Furthermore, nearly two thirds (61 per cent) have no idea that personal assets can be clawed back if they default on the business loan, believing that only business assets would be affected.
So, let’s look at some key points SME’s should consider when thinking about signing a personal guarantee:

  1. Personal Guarantees are exactly that – they’re personal. In other words, they allow lenders to call on your personal assets if you can’t pay back your business loan. And that can potentially mean your home as well as savings and any other personal assets are at risk.
  2. You may be able to negotiate the limit of the guarantee. For instance, if the loan is for £500,000, you may be able to limit the amount of the PG to £250,000 for example. There is often an assumption that the lender will want the entire loan to be guaranteed, but that’s not always the case. So negotiate or ask your broker to negotiate.
  3. Business owners don’t go into business expecting to fail. Otherwise they wouldn’t go into business. However, there is a high attrition rate in the first 5 years of a business’s life. As a consequence, be realistic. Your PG could be called upon.
  4. Personal Guarantee Insurance is an option you may wish to consider. In effect it protects your personal assets should you default on the loan and is based on what percentage of the Personal Guarantee the borrower wants to cover. There are some caveats and stipulations, so be sure to discuss PG insurance with your broker before going ahead.
  5. Should the business become insolvent, your PG will still be live. In other words, it doesn’t disappear with the company. In essence, as far as the lender is concerned, this is exactly what the personal guarantee is for. Should the business become insolvent, they can still recover the debt from you personally.
  6. Speak to a solicitor before you sign a PG and discuss with them what you are signing as well as the potential repercussions. In fact, many lenders will advise or even insist that you take what is called ‘independent legal advice’ to ensure that you are properly advised by a solicitor before you go ahead and sign.

Personal guarantees are often a necessary part of taking out business finance. That said, they need to be entered into with careful thought. So, make sure you speak to your solicitor and that you understand the full implications of what you are signing.