What is Personal Guarantee Insurance?
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 by definition 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, you still have 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.
Of course, in an ideal world, you would never have to sign a personal guarantee but, if you want to secure funding for your business, then you are usually left with little or no option. An executed PG will be part of the lender’s requirements before funding is provided.
And of course, signing a PG has certain implications for you as the director of the business, because you are putting your and your family’s personal assets at risk, most notably your home.
So, what to do?
I wrote in some detail about PG’s and how they work in a previous blog, which you can read here:
The purpose of this blog is not to cover the same ground I covered in my previous blog, but rather, to explain in more detail something I touched upon previously. Namely Personal Guarantee Insurance.
So, let’s look at it in more detail by asking three key questions:
- What is it?
- How does it work?
- What are the benefits?
What is it?
Personal guarantee insurance is in effect an indemnity policy to cover the worst-case scenario, namely that the business fails, and the lender calls upon your personal guarantee as the director in order to repay the loan.
Should this happen, then PG insurance would ‘kick in’ and effectively cover the PG given by you as the director. This is usually up to a maximum of 80% of the value of the PG that was given, although this can vary depending upon the type of business finance or commercial loan that you have taken out.
As a result, taking out personal guarantee insurance means that much of the risk associated with a PG can be minimised, meaning the personal assets of the director will not be threatened.
How does it work?
PG insurance is available to one or more directors within a company, as it is likely that all the directors will have provided a PG.
The insurance is put in place at the same time as the loan is taken out and the PG documentation is signed and executed.
As I mentioned above, the maximum available is 80% of the value of the PG, although in some situations, for instance where the loan you are taking out is an unsecured business loan the insurance may be limited to 60% of the value of the PG.
The maximum level of cover is usually up to £400,000.
The premium is paid by the business as it is an associated cost of taking out a business loan and can be paid by instalment on a monthly basis. Policies normally run for 12 months and can be renewed on an annual basis thereafter.
Like any insurance, premiums vary and are dependent on a number of factors including the amount being covered under the policy, as well as other variables such as the type of business finance being taken out, the financial stability of the company in question, the business sector in which the company operates and the business’s credit score.
What are the benefits?
Purchasing a PG insurance policy has the benefit of providing you as the director of the company giving the PG, with peace of mind that should the business get into financial difficulties or even fail, then your personal liability under the PG is considerably reduced.
As I said in my previous blog, personal guarantees are not to be entered into lightly, so do your research, review the options and speak to an expert.
Only then should you make a decision about how to proceed.
But having personal guarantee insurance in place can certainly help to off-set the liability under a PG, and so is definitely worth considering.