Taking out business finance can be challenging at the best of times, but with the current crisis more lenders than usual are also asking for personal guarantee as additional security.

A recent Freedom of Information (FOI) request to the British Business Bank, the Government owned bank responsible for facilitating the Coronavirus Business Interruption Loans (CBILS), identified £1.22bn of emergency funding were supported by personal guarantees.

In this article, we look at what personal guarantees are, the legal issues associated it with them, what happens in insolvency and the alternatives

What is a personal guarantee?

A personal guarantee is where one of more company directors personally guarantees to repay any of the debts of their business if the company is unable to meet its financial obligations, effectively putting their own personal assets at risk.

For this reason, we always advise considering personal guarantee insurance, which we will go into more detail on below, to bring peace of mind.

What is personal guarantee indemnity?

Some lenders may seek to add an indemnity to a personal guarantee. This means if the business fails to meet its obligations and consequently the lender suffers losses, the indemnity assures the lender that the person giving the indemnity pays the losses.

We asked James Storm, Commercial Mediator of Countrywide Solutions for his opinion on this.

“Most standard form personal guarantees include an indemnity by the guarantor as well as a guarantee. A guarantee includes rights against lenders or borrowers, so lenders generally look to protect their interest by limiting or excluding guarantor’s rights with the additional protection of an indemnity included in the terms of a personal guarantee.

Guarantors should be aware that an indemnity is independent from the guarantor’s obligations under a guarantee. The result is that if the underlying transaction is found to be invalid, the lender will usually still be able to rely on the indemnity. This is because the lender continues to have protection from the guarantor’s promise to indemnify the lender for any damages suffered if the principal obligor fails to perform its obligations under the principal contract.

Consequently, even if a guarantee is invalid, it is imperative that both lenders and guarantors consider their position carefully and seek professional advice as early as possible on how to resolve any issues arising from a personal guarantee. Entering negotiations early on will provide valuable breathing space. It may also give the parties an opportunity to avoid litigation by mediating a satisfactory settlement without detrimentally effecting their ongoing rights and financial liabilities.

Ultimately, the earlier professional advice is sought once a personal guarantee is likely to be called on, including when the company is insolvent, the more likely the parties will be able to save valuable time, avoid excessive costs and achieve a sensible commercial outcome.”

What are the recent market trends?

For all Government guaranteed Bounce Back Loans (BBL) and CBILS of less than £250,000, the lender is not permitted to request Personal Guarantees. For CBILS loans in excess of £250,000 lenders are allowed to request Personal Guarantees but this is limited to 20% of the outstanding amounts after the proceeds of business assets has been applied.

These schemes are due to be withdrawn on 31 March 2021 with it being replaced by the Recovery Loan Scheme. It is expected to run in the same way as the CBILs loan with that for loans in excess of £250,000, lenders can request personal guarantees.

Other market factors such as the introduction of the crown preference during insolvency from 1 December 2020 (which places personal guarantees attached to floating charge or unsecured creditor positions at greater risk).

In the aftermath of Covid-19, lenders are likely to tighten credit criteria and request additional security by way of personal guarantees.

What are the alternatives?

We asked Todd Davidson, Managing Director of Purbeck Insurance, what businesses can do if they don’t want to borrow with personal guarantees:

“There are business finance products available which do not require personal guarantees, but they can be expensive. You may also be able to negotiate out of a personal guarantee, particularly where the lender is able to take a debenture of fixed charge over physical assets although the level of funding provided may be limited.

One alternative solution is to consider Personal Guarantee Insurance.

Personal Guarantee Insurance offers protection against the risk of a Personal Guarantee being called by a lender and will offset any outstanding obligations called in under a Personal Guarantee following business failure. All policies are backed by an A-rated insurer.

The level of cover is based on a fixed percentage of the Personal Guarantee the company director wishes to insure and this is dependent on whether the corresponding finance facility is secured or unsecured. In essence, if the business does fail, up to 80% of the loan will be settled by the insurance rather than the business owner’s home, savings and other personal assets being called on to settle the debt.

The cover is available for new or existing personal guarantees signed in support of a wide range of business finance facilities.

74% of SMEs would be more likely to sign a personal guarantee knowing that they could insure against the risk of a call on the personal guarantee.”

To find out more about how Personal Guarantee Insurance works and to get a personalised quote, email Todd on t.davison@purbeckinsruance.co.uk or call 0208 004 7250.

What happens in insolvency?

We asked Isobel Brett, Insolvency Practitioner at Bretts Business Recovery, if directors can get out of personal guarantees if their business is insolvent:

“Personal Guarantees can come as a nasty surprise to directors in the unfortunate event of their business failing as they have sometimes been given unknowingly or a long time ago without retaining copy paperwork.

This seems to be a particular problem in the construction industry, where directors are caught out by personal guarantees when filling in a credit application form for the supply of building materials. The small print does not always, it seems, make it clear that they are guaranteeing payment personally.

Personal Guarantees are enforceable in the event of insolvency and whilst it may be the case that the guarantor didn’t actually realise what they were signing. This is hard to prove, especially as directors are held to a higher standard than regular consumers signing credit agreements and contracts.

In all cases we would advise seeking professional advice in the event of Personal Guarantees being called on and ideally, before the default event occurs so that more options can be explored.”

Get in touch with Isobel if you for a free and confidential discussion if you have any concerns regarding any of the above or being insolvent by emailing isobelbrett@brettsbr.co.uk.

What are the legal issues?

We asked Emma Lee from Jarmans Solicitors about the legal issues associated with personal guarantees.

“For those directors being asked to give guarantees, often there is little choice. Guarantees are a standard form of security required by banks and lenders for a range of different facilities, most of which are necessary for the business to function, expand or complete a particular project. Without a guarantee, the business often cannot obtain the finance they require.

It is important, however, that when agreeing to guarantee any form of credit to the business, whether that be relevant to a mortgage, loan or other facility or whether the same is required by an intended trade creditor, that full and proper, independent legal advice is obtained on the content of the guarantee that amendments are made, as necessary and where possible, to avoid the potential for unlimited liability.”

If you need to access finance but are worried about taking out a personal guarantee, it always best to talk to us. We can help you review and decide what is best for you and your business, and put you in touch with the experts who can help you.

Call 01474 853 856 or email discovery@a4g-llp.co.uk for further support. 

Contact me today!

Malcolm Palmer


Managing Partner

01474 853856

Send me a message