Starting Up

How personal guarantees can increase your financing options

What to look out for

  • Red You are accepting responsibility for the debt if the company does not repay for any reason
  • Amber Most Personal Guarantees are unsupported, so no legal charge on your home
  • Green A Personal Guarantee will increase your business finance options and reduce the cost of borrowing

Discover why providing a personal guarantee can increase choice – and save you money - when securing finance for your business.

If I give a personal guarantee why be a limited company?

I can see where you’re coming from but it’s not as black and white as that or as negative. Your personal guarantee would be limited to a specific amount for agreed liabilities. You are not signing everything away as the remaining liabilities outside of that guarantee remain the responsibility of the company.

Who has prime responsibility for the debt?

The prime responsibility for the debt still lies with the company itself and, providing that the company keeps to the original funding agreement, there is no problem.  Indeed, even if there is a breakdown, such as problems repaying, then the lender will generally work with the borrower – i.e. the company – to try to come to a mutually acceptable arrangement.  Even if that fails the lender would normally have to go through various procedures, including issuing a formal demand for repayment to the company, before calling on the guarantee.

Why provide a personal guarantee if I’m already putting in cash?

Another question that is often asked but remember what is at stake here.  You are the business owner who stands to benefit from the increasing profits from a growing business, whereas the lender is providing a specific amount of funding for an agreed but finite return.  If the business is a huge success you gain significantly whilst the lender will still only get the same defined return on their funds. 

Keeping risk to a minimum

You’re right, they are providing debt on which they charge interest, not equity or risk capital which would involve them seeking a far higher potential reward than the interest rate they charge.  Also, as lenders, part of their role is to minimise their risk as far as possible.  Having a guarantee in place, does mean that they have somewhere else to turn if things go wrong, plus the general feeling amongst lenders is that a personal guarantee tends to focus the mind of the guarantor in keeping the debt as low as possible when things aren’t going well. “Skin in the game” is a phrase often used.

Providing nothing goes wrong the guarantee will never be called upon, and you will benefit from the growth enabled by the original funding.  A bit simplistic, but you could look at the guarantee as an umbrella for the lender in case of rain.

The benefits of giving a personal guarantee?

Yes, primarily many more funders will be willing to help you. Many funders will not lend without personal guarantees, particularly to young businesses. Also, as I mentioned before, the guarantee reduces risk for lenders.  Increased choice and reduced risk usually equal lower price. Agreeing to give a personal guarantee is likely to save you money.

Useful links

Asset finance: All the business owner needs to know

Business loans: How to bring cash into your business

Commercial property finance: Securing a commercial mortgage

Business funding: How to decide on the right type of finance

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