How lenders use it
A limited company protects its owners from its debts. A lender who wants more comfort asks the owners for a personal guarantee. It shows the owners stand behind the loan, and it gives the lender a second source of repayment.
A guarantee is only as good as the guarantor. The credit team looks at the guarantor's assets, debts, income and credit report. Some ask for a statement of assets and liabilities. A guarantor with no assets adds little security.
The guarantee can be limited to a set amount or a share of the loan, or unlimited. It may be secured on a home or other property, or unsecured. It is often joint and several, so each guarantor can be liable for all of the debt.
Lenders take care to make the guarantee enforceable. The guarantor should get independent legal advice. Where a spouse or partner guarantees the other's business, UK banks follow steps from the House of Lords case Royal Bank of Scotland v Etridge (No 2) to guard against undue influence. Some government-backed schemes limit personal guarantees, so the lender checks the scheme rules. This is general information and not legal advice.
Worked example
Example only. A lender makes a £200,000 loan and takes a personal guarantee limited to £100,000. The company fails. The lender recovers £120,000 from the company's assets, leaving £80,000 unpaid.
The guarantor owes £80,000, which is under the cap. If the shortfall had been £150,000, the guarantor would owe £100,000 and the lender would bear the last £50,000.
Common confusions
A personal guarantee is not a debenture. A debenture is the company's security over its own assets. A personal guarantee is a person's promise, backed by their own assets.
A personal guarantee is not a director's loan. A director's loan is money the director lends to the company. A guarantee is a promise to repay the company's lender.
A corporate guarantee comes from another company, such as a parent. A cross guarantee ties several group companies to each other's debts. In US property lending, a carve-out or bad-boy guaranty makes the owner liable only for specific acts such as fraud.
Questions lenders ask
What is a personal guarantee on a business loan?
A promise by a director or owner to repay the company's loan if the company cannot. The lender can claim from the guarantor's own money and assets, up to any limit in the document.
Can a personal guarantee be limited?
Yes. It can be capped at a set amount or a share of the loan. Many are unlimited. The document says which.
Why does a lender ask for independent legal advice?
To show that the guarantor understood the document and signed freely. Without it, a guarantor could challenge the guarantee later, for example on grounds of undue influence. Lenders often ask for a certificate from the guarantor's solicitor.
What does a lender check about the guarantor?
Identity, credit report, income, assets and debts, and sometimes a signed statement of assets and liabilities. It also checks whether the assets are held jointly or already pledged.
Related terms
- Debenture: Security over a company's assets
- Five Cs of credit: Five headings a credit team uses to judge a loan
- Conditions precedent: What the borrower must deliver before the first draw
- Credit memo: The lender's written case for a credit decision
Related pages
- Business loan document checklist
- Business loan origination software compared
- Klarefi for independent business lenders
- All glossary terms
This page is general information for lenders. It is not legal, tax or credit advice.