Small business owners will often use a personal guarantee to secure a loan as they have a vested interest in the success of their business. Few SMEs have enough cash within their organisation to self-fund growth, so personal guarantees can be a very useful method of securing crucial business finance that an SME may not have been able to secure otherwise and could help propel a business forward.

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What is a Personal Guarantee?

A personal guarantee is a promise to repay credit issued to a business (usually a director or partner of the business). It is typically signed during the loan application process and is a legally binding contract.

If the business becomes unable to repay this debt at any point, then the individual who has signed the personal guarantee, they as an individual may become personally responsible for the debt which means the lender may call on the personal guarantee to cover any outstanding debts and will go after the guarantor’s personal assets, e.g., their home, your savings, investments, and other valuable assets.

The personal guarantee is therefore seen as “added security” for lenders.

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Personal Guarantees: The pros and risks

While there are several advantages of using a personal guarantee to secure funding for your business, it is important to consider all the potential risks as well.

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Pros of personal guarantees

• Personal guarantees can allow your business to acquire finance even if it has minimal credit history or bad credit.
• A lender might offer more favourable arrangement terms – such as interest rate – because of the guarantee.
• The funding acquired via a personal guarantee can help your business grow and reach its potential.

Risks of personal guarantees

• While you may be confident that you will be able to repay a loan or keep up with finance repayments now – and Bluestone will never put an arrangement together that we are not confident that you can afford – no one has a crystal ball. Should your business run into unforeseen difficulties, your personal assets might be at risk.
• If your business is set up as a partnership or you are a sole trader, personal assets cannot be pursued by creditors to settle business debts. However, if you have offered a personal guarantee, your personal finances could be affected.
• If your personal assets are insufficient to cover the debts of the business, you might have to declare bankruptcy.

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What is Personal Guarantee Insurance?

When a business owner or director signs a Personal Guarantee, they are essentially putting their personal assets on the line, most notably their home. If the business can no longer repay the loan, the business owner or director could suffer as a result.

Personal Guarantee Insurance (PGI) is designed to give confidence to grow businesses through securing crucial finance and protecting personal assets. There are many unforeseen circumstances that can have adverse effects on businesses and their bottom line, from market downturns and key customers going out of business, to suppliers failing in their duty and illness or absence of a key individual within the company.

PGI can be tailored to your individual circumstances, so businesses can state the amount they want to insure, and they can choose how many directors they would like to be noted on the policy. Purchasing this insurance policy can help to reduce the risk to personal estates, leaving owners and directors to get on with running your business and securing financial peace of mind.

PGI is available against Personal Guarantees provided against a wide range of business loans:

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Secured loans

Where the lender has taken a charge over company assets or has a contractual right of recover over a company asset that funds have been lent against in additional to the Personal Guarantee.

• Asset finance
• Commercial mortgages
• Invoice finance
• Other secured loans
• Qualifying peer to peer loans

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Unsecured loans

Where the Personal Guarantee and any associated charges over personal assets are the only security that the lender has taken.

• Credit cards
• Overdrafts
• Peer to peer loans
• Short-term working capital loans
• Other unsecured loans

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What is a joint and several Personal Guarantee?

A joint and several personal guarantee, means that all personal guarantors are both jointly liable, as well as individually liable, for the total amount of the debt, e.g., if there were 4 guarantors, each would be fully liable for the total debt due on that loan. If 3 out of 4 of the guarantors didn’t pay, the remaining guarantor would have to repay the total outstanding balance of the debt instead.

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Personal Guarantee Insurance with Bluestone

When you sign a Personal Guarantee, we understand it’s more than your signature on the line.

We are delighted to offer specialist insurance for SME Directors entering any of the finance agreements we arrange.

Covering up to 80% of the risk, the insurance provides protection and peace of mind for you and your family and allows you to concentrate on growing your business. Personal Guarantees are additional security typically required by lenders from SMEs, especially when the assets being financed offer little security. Few SMEs have enough cash within their business to self-fund growth so Personal Guarantees are common in this market.

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Product Features

• Up to 80% cover.
• Insurance available up to £400,000.
• Unlimited access to dedicated support desk for advice and claims.
• Insure up to 5 Personal Guarantees per policy if multiple guarantees have been signed.
• Insurance available for newly signed or historic Personal Guarantees.
• Additional Directors can be included on the policy where Personal Guarantees have been signed on a joint and several bases.
• Annual or monthly payment options available.

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For more information on Personal Guarantees or to discuss a bespoke finance solution for your organisation, contact our team today.

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BS.202308.01BL6