What is a personal guarantee on a loan?

As a condition of raising business finance, directors are often required to provide additional security to the lender by signing a personal guarantee.

A personal guarantee is a legal promise to pay back a loan in full as per your agreement. In other words, an agreement to act as guarantor for the loan.

By signing a personal guarantee, the director is placing his or her personal assets at risk.

If the business fails to pay back the loan, the lender can seek recoveries from the director(s) who have signed the personal guarantee.

In most cases, signing a Personal Guarantee can be a key component in securing business finance. Given this, many borrowers are willing to provide this to secure business finance.

What are the pros and cons of personal guarantees?

There are a range of pros and cons when signing a personal guarantee and it is important that you are aware of these when deciding to agree to one.

The most obvious positive is they can increase the likelihood of being accepted for finance.  Lenders see personal guarantees as extra reassurance that you are committed to repaying the loan and sticking to your agreement.

Because of this, you may be able to access better rates and borrowing amounts from a wider range of lenders.

The requirement of a personal guarantee is more common for small and medium sized businesses (SMEs) or businesses that have not be trading for long periods of time.

The downside to personal guarantees is that your personal assets are at risk if your company is unable to pay back the loan. Many borrowers opt for personal guarantee insurance to protect their assets in the event of a default.

When deciding whether a personal guarantee is the right choice, you must consider the positive impact of the loan on your business and your ability to make the repayments.

If your company is financially stable and can comfortably meet the financial obligations of the loan, then a personal guarantee is not such a high risk to your personal assets.

In the unfortunate event the business becomes insolvent, the lender can call on the personal guarantee to recover the outstanding finance that the business owes to the lender.

What to consider when signing a personal guarantee

  • What constitutes as a default?
  • How were your net assets assessed prior to signing the personal guarantee?
  • Do the PG terms allow for a remedy period?
  • Will the lender seek payment on demand, or will there be a notice period?
  • How will the lender enforce the guarantee?

What is personal guarantee insurance?

Personal guarantee insurance is an annual insurance policy that provides insurance cover for personal guarantees provided by directors of limited companies in support of a business loan.

The follow types of business loans are eligible for insurance:

Secured Business Loan

Asset Finance

Business Finance

Commercial Mortgages

Invoice Finance


Property Bridging

Property Development

Other Secured Loans

Secured Peer to Peer Loans

Unsecured Business Loan

Business Finance

Credit Cards


Trade Finance

Unsecured Loans

Unsecured P2P Loans

The level of cover is based on a fixed percentage of the personal guarantee and depends on whether the personal guarantee is signed in support of a secured or unsecured loan.

For Personal Guarantees signed in support of secured loans:

  • Year one and thereafter: 80%

For Personal Guarantees signed in support of unsecured loans:

  • Year one: 60%
  • Year two: 70%
  • Year three and thereafter: 80%

What happens if you default on a personal guarantee?

In the event of a default on a personal guarantee, in most cases you will lose the asset(s) you used as collateral, if the guarantee is supported by security.

If the guarantee is called upon, you will be given notice from the lender stating their payment terms as per your contract.

You will need to pay the amounts owed within the timeframe given in the notice. If you do not make payment within the specified timeframe, then the lender will begin legal proceedings against you.

The lender will seek a charging order from the high court to give them the right to seize and auction your asset(s) that were used as security to settle the debt.

Updated: May 20, 2021