What does a personal guarantee mean for a director?

A personal guarantee is a separate contract in which you promise to pay a lender if your company does not. It makes you personally liable for the company's debt, and the lender can enforce it against your own assets.

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Why a lender asks for one

A limited company is a separate legal person, so its debts are its own. If it fails, the lender can claim only against what the company owns. A personal guarantee gives the lender a second person to pursue: you.

Lenders ask for guarantees where the company has little security of its own: an unsecured loan, a revolving facility, invoice finance, a lease on premises. The guarantee also tells the lender that the people running the company stand behind the borrowing. For you it turns a company debt into a personal one if things go wrong.

The terms that decide your liability

Joint and several liability
Where there are several guarantors, the lender can pursue any one of you for the whole debt. A director with a small shareholding can be liable for all of it, and is left to recover the others' shares from them.
A cap
A capped guarantee limits your liability to a stated amount. An uncapped one covers the whole debt and can include interest and the lender's costs of enforcing it. Ask the lender whether it will agree a cap, and at what figure.
A continuing guarantee
A guarantee can cover every debt the company owes that lender, now and later, and not only the loan it was signed for. Read whether yours is limited to one facility.
Release
Ask what releases the guarantee: repaying the loan, leaving the company, or the lender's agreement. Get any release in writing, because a continuing guarantee does not end on its own when a loan is repaid.

When the lender calls on it

  1. 1

    The company defaults

    It misses repayments or breaks another term, and the lender demands repayment of the whole facility from the company.

  2. 2

    A demand to you

    The lender writes to each guarantor demanding payment under the guarantee, up to any cap.

  3. 3

    Recovery from your assets

    If you do not pay, the lender can sue you for the debt and enforce a judgment against your assets, including through a charge on your home.

  4. 4

    Bankruptcy

    As a last step, a creditor owed enough can petition for your bankruptcy.

A man writing figures in a notebook beside a laptop and calculator

Your home and your family

A guarantee is a personal debt and can be enforced against what you own. Some are also secured by a charge over a property from the start. If your home is jointly owned, the other owner is affected whether or not they signed. Where the lender asks a spouse or partner to sign or to charge their share of the home, it will normally want confirmation that they have taken independent legal advice first, following the House of Lords' decision in Royal Bank of Scotland v Etridge.

Depending on its terms, a guarantee can be enforced against your estate after your death. Death in service benefit from an employer's scheme is paid to your family and does not repay the lender, so the claim against your estate stays.

How much of a guarantee is uninsured

Illustrative example

Two directors guarantee a £200,000 loan to their company jointly and severally. One holds £50,000 of life cover written for the family.

Borrowing guaranteed
£200,000
Your liability under joint and several terms
£200,000
Cover that would repay this lender
£0
Life cover written for the family
£50,000
Uninsured liability if you die
£200,000

The family policy pays the family. Unless cover is written to meet the guarantee, the lender's claim against the estate comes out of what the family would otherwise inherit.

Cover for a guarantee

Life cover for a guarantee can be written as decreasing term assurance, which falls as the debt is repaid and costs less than level cover for the same starting sum. Critical illness cover can be added. Separate personal guarantee insurance, offered by some general insurers, pays part of a guarantee if it is called while you are alive.

Whether to have cover, how much, who owns the policy and whether to write it in trust are regulated advice, and the answer depends on the rest of your plans. Business protection and how much life insurance you need.

Before you sign

Personal guarantee calculator

Your share of borrowing you have guaranteed, set against life cover that would pay the lender.

Open the calculator

Questions people ask

Can I be released from a personal guarantee?

The lender decides, under the guarantee's terms. Ask when the loan is repaid, when the company refinances, or when you leave the company, and get the release in writing. A continuing guarantee stays in force until the lender releases it.

Does a personal guarantee end when I die?

Not always. Depending on its terms, the lender can claim against your estate for what the company owes. Cover written for the guarantee can repay it so your family's inheritance is not used.

Can a lender take my house under a personal guarantee?

If you do not pay a demand under the guarantee, the lender can sue you and enforce the judgment, which can include a charging order on your home. Some guarantees are secured on a property from the start.

Is a personal guarantee the same as joint and several liability?

No. A personal guarantee is the promise to pay. Joint and several liability is a term in it where there are several guarantors, letting the lender pursue any one of you for the whole amount.

Does leaving the company end my guarantee?

No. Resigning as a director or selling your shares does not release you. Ask the lender for a release as part of the exit, and make it a condition of the sale agreement. Selling your business.

Business loans

A business loan is a sum your business borrows and repays with interest over a fixed term, in regular instalments. The lender prices it on the risk it reads in your accounts, your bank statements and any security you offer. Compare offers on the total you will pay in pounds, counting every fee. The full answer.

Unsecured business loans

An unsecured business loan is lent without a charge over your company’s property or equipment, so the lender relies on your trading record and on personal guarantees from the directors. Sums are smaller and pricing is higher than secured lending, and the guarantee puts your own assets behind the debt. The full answer.

What is a debenture?

A debenture is a legal document that gives a lender security over a company’s assets, through fixed charges over named assets and a floating charge over the rest. It must be registered at Companies House, and it decides where the lender stands if the company becomes insolvent. The full answer.

What happens if my business cannot repay a loan?

Missed repayments put the loan into default. The lender can demand the whole balance, enforce its security, call on any personal guarantee and, if the company still cannot pay, use insolvency procedures. Talk to the lender before the first missed payment, and take advice from a licensed insolvency practitioner if the company cannot pay its debts as they fall due. The full answer.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

The advisers for this subject

Sunny Bharj

Sunny Bharj

Independent Financial Adviser

Tony Springer

Tony Springer

Independent Financial Adviser

Advising through Equity & General Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority. Check the firm on the FCA register under number 474163.

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