Personal Guarantees

We recommend you take legal advice before considering any guarantees or indemnities.
Personal guarantees are commonly required by lenders to minimise their risk when lending money to a business. Before you become a business loan guarantor, you should know the legal basics of the contractual relationship you're entering into.

What is a Personal Guarantee?

A PG is a contractual promise to repay the business debt by an individual if the company defaults and can't make its contractual obligations. As a form of additional security, this type of guarantee means that in the case of insolvency or default, the guarantor is personally responsible for the outstanding balance. A PG may be required by lenders to minimise their risk when lending money to a business.

Giving a PG removes the corporate veil that almost all business owners enjoy and leaves you personally liable for the debt. You should consider this and consider the impact associated with this risk on your personal finances and private life.

What is a director's guarantee?

When it comes to business finance a PG and company director guarantee have the same meaning. I.e. A business director's personal guarantee.

How Personal Guarantees work

If a company doesn't have assets that can be identified and used for security, such as accounts receivable, business premises, or land, and they are hoping to obtain an unsecured business loan, a director's personal guarantee can be an attractive option to help secure the loan.

Lenders will see this as a positive sign of skin-in-the-game that the director is willing to take on the personal responsibility to make sure that any loans are repaid as promised.

Before you sign a legal document providing a PG, you should have your Broker explore non-traditional ways of identifying security that may not have a recorded underlying company asset. Business directors should speak to their Broker about alternative funding options and finance options that might be available.

Types of Personal Guarantee

There are two types of PG: limited and unlimited.

PGs are unlimited unless they are expressly limited to a percentage of the loan value or guarantor's net assets by a limitation of liability or an exclusion clause.

In the case of insolvency or default, an unlimited guarantee enables the lender to commence legal proceedings to pursue you for the outstanding balance of the loan.

With a limited guarantee, the guarantor's liability is limited by a limitation of liability clause or an exclusion clause in the guarantee document. The limit will likely be a percent of the loan value but could also be a percentage of the guarantor's net assets. A limitation of liability clause or an exclusion clause can also specify how long the guarantee applies.

Guarantees can be:

  • limited to part of the obligations of the debtor
  • capped to a specific amount
  • limited in time
  • subject to specific methods of notice
  • made subject to any other limitation
  • any other condition which may be agreed upon

Guarantees vs. Indemnities

Guarantees and indemnities are a way in which lenders protect themselves from the risk of a business defaulting on its loan.

The PG should not be an indemnity. A guarantee is a secondary obligation because it is contingent on the obligation of the company to repay the lender. A contract indemnity clause is a primary obligation to accept liability for another's loss. It's important to recognise if you will be acting as an indemnifier, a guarantor, or both.

Who can get a Personal Guarantee?

Sole traders and unlimited partnerships accept complete liability for the company’s debts and therefore a PG won't apply to them.

Guarantees are applicable when companies have limited liability status. Types of a limited company are a private limited company (Ltd.), a public limited company (PLC), or a limited liability partnership (LLP).

They can be provided by an individual director or more than one director. By co-signing a PG you can reduce the risks by not being the sole director responsible for the debt. Splitting the guarantee with your other directors is a great way to minimise the risk but you will need to ensure you are not jointly and severally liable.

Personal guarantee insurance

Personal guarantee insurance provides guarantors with a safety net against insolvency in the case where a business defaults on payments on its outstanding debt.

In the event of insolvency and after liquidating the business assets, if the financial institution isn't made whole they may force you to sell personal assets to repay the businesses debt, personal guarantee insurance covers up to 70% of the claimant's net liability.

We recommend personal guarantee insurance as it is a form of security, for you as an individual.

Considerations for guarantors

Giving a personal guarantee is both a business decision and a personal decision that can mean the difference between obtaining a much-needed cash injection into your business and not.

Before signing a personal guarantee agreement, you may want to obtain independent advice. A creditor claim can have devastating consequences on your personal life if the company doesn't meet its financial obligations.

We recommend you take legal advice before considering any guarantees or indemnities.