Are personal guarantees required for a business loan?

A personal guarantee is a legally binding commitment by an individual to pay back the business loan debt if the company cannot. 

Very often, when a business lender has assessed and approved a loan application for something like £50,000 or £500,000, they will ask for a personal guarantee on top, signed by one or more of the business owners or directors.

Should the business be unable to repay its loan or goes into liquidation, the lender can legally approach the person who has made a guarantee to cover the outstanding balance – and they are obligated into this financial agreement.

In the majority of business loan applications, a personal guarantee is required and is simply a signature during the application process.

This can feel risky, especially for business owners who want to separate their personal and business finances. It is possible to avoid personal guarantees if you have a superb financial record or add security or collateral to your application.

Before agreeing to any finance, it is usual to understand how personal guarantees work, when they are required, and how to manage the risks.

USEFUL TIP

You should check whether the guarantee is unlimited or capped. An unlimited guarantee means you could owe the full loan amount plus costs. A capped guarantee limits your exposure to a set amount.

Overview

• A personal guarantee is a promise to repay the loan personally if the business cannot
• It is commonly required for small businesses and limited companies
• It reduces risk for lenders, especially with newer or smaller firms
• Directors or owners are usually the ones who provide it
• Some lenders offer loans without guarantees, but terms may be stricter

What is a personal guarantee for a business loan?

Very simply, when you apply for a business loan and it is approaching the final stages of approval, one or many of the business owners or directors will be required to sign a personal guarantee electronically which legally requires them to pay back the debt if the business cannot.

This means that if the repayments are not made and the loan is in arrears, the business lender can approach the personal guarantor for repayment out of their own personal pocket.

Why are personal guarantees required for a business loan?

A personal guarantee gives the lender an extra layer of security. If the business fails to repay, the lender can pursue the individual who signed the guarantee. This makes lenders more willing to approve applications.

When a business borrows money, there is always a chance they may not be able to repay, especially given all the curveballs that a business can face internally and from changes in the economy. 

This risk is higher with small and medium-sized businesses, especially those with limited trading history or weaker financials.

Business lenders also recognise that companies that are failing might try to write off their debts by declaring bankruptcy or falling into liquidation – but a personal guarantee still means that they can approach a connected individual to recover their debts.

They are also used when there is no strong collateral. If a business does not have assets like property or equipment to secure the loan, a personal guarantee often replaces this.

In the UK, around 70% of SME loans require some form of personal guarantee, particularly for unsecured lending. This shows how common they are in the market.

Who gives the personal guarantees?

Personal guarantees are usually given by the business owners or directors. In a limited company, this is often the main shareholder or managing director.

If there are multiple directors, lenders may ask all of them to sign which spreads the responsibility and gives the lender more security.

For partnerships, each partner may be required to provide a guarantee. In sole trader businesses, the owner is already personally liable, so a separate guarantee is less relevant.

It is important to understand that signing a personal guarantee means your personal assets could be at risk too. The lender may use legal action to recover their losses through your savings, property, or other valuable assets depending on the terms.

Can I get a business loan without personal guarantees?

Yes, it is possible to get a business loan without a personal guarantee, but it is less common. This is possible in the following ways:

Established companies with strong financial records – Having consistent profits, a long financial history and good credit may qualify for a business loan without guarantees. 

Assets and security – Businesses with valuable assets can also secure loans against those assets instead of using a personal guarantee.

Higher interest rates – Some alternative lenders and fintech platforms offer unsecured loans without guarantees, but this will likely incur higher interest rates.

Government loans – Government-backed schemes may also reduce the need for guarantees, although some still require limited personal backing.

Last year, only about 30% of UK SME lending was done without personal guarantees, showing that while it is possible, it is not the norm. In which case, you may have to seek these out.

How to avoid personal guarantees with business loans?

Avoiding personal guarantees usually comes down to reducing the lender’s risk in other ways.

One of the main options is to offer security. If your business owns assets such as property, vehicles, or machinery, these can be used instead of a personal guarantee.

Improving your financial profile also helps. Strong accounts, good cashflow, and a solid credit history make lenders more confident.

You can also look for specialist lenders who offer non-guarantee products. These are more common in invoice finance, asset finance, or larger commercial loans.

In addition, you may be able to negotiate with the lender if you believe you have a strong credit score and financial foundation. Some lenders may adjust the amount you are able to borrow or agree to limit the guarantee rather than remove it completely. For example, they might cap your liability instead of making it unlimited.

Will a business lender accept a guarantee from someone else like a parent or friend?

As a parent or sibling, you may want to offer a personal guarantee for your child, helping them grow or get their business off the ground. This may be possible if you speak with your business lender.

Again, understanding the risks is key and if the business does not repay its debts, this responsibility will fall onto this relative or friend to cover the losses.

What should I consider before giving a personal guarantee for a business loan?

Before signing a personal guarantee for a business loan, you should fully understand the risks. If the business cannot repay the loan, you may be personally responsible for the debt. This could affect your personal finances and credit score – and could result in losing some personal assets if the amount overdue is substantial.

You should check whether the guarantee is unlimited or capped. An unlimited guarantee means you could owe the full loan amount plus costs. A capped guarantee limits your exposure to a set amount.

It is also important to review the terms carefully. Some guarantees allow lenders to act quickly to recover money, including taking legal action or claiming assets.

You should start by considering your business’s own ability to repay. In times of cashflow shortages, getting an injection can seem like a lifesaver, but you will be liable for the loan amount and interest if you cannot keep up with repayments.

You should be confident that the business can meet its repayments – and always look at cashflow, future plans and potential risks.

Finally, if you want just that extra layer, you may want to seek professional advice. Speaking to an accountant or solicitor can help you understand the legal and financial implications before committing.