To sign or not to sign a Personal Guarantee – taking the stress out of this business dilemma

Business Insights

Todd Davison, Managing Director, Purbeck Insurance Services

You have made it this far through the pandemic. Whether you’ve survived or thrived, new funding could be high on your agenda, but you could find your options are limited unless you are willing to sign a Personal Guarantee.

One way to make that decision easier is to use Personal Guarantee Insurance. This relatively new type of protection is helping many small business owners mitigate the risk of signing a Personal Guarantee - and hopefully sleep better at night. Across the UK, SME loans worth in excess of £40m are now protected by Personal Guarantee Insurance from Purbeck Insurance Services.

Loans may increasingly depend on signing a Personal Guarantee

Signing a Personal Guarantee is not something many business owners relish, but as a consequence of the pandemic, many lenders have a restricted credit risk appetite and some in the alternative funding market may withdraw funding facilities for small businesses. Add to this the amendment in insolvency legislation from the end of this year which moves HMRC up the queue in the distribution of assets in the event of insolvency.

This all means that access to small business funding is increasingly expected to depend on signing a Personal Guarantee, that in effect, puts the business owner’s personal assets on the line if the business fails.

The ins and outs of Personal Guarantees

Personal guarantees give the lender a written promise, made by a director or number of directors, to accept liability for a company’s debt. If the business defaults on a loan the director’s home, car and anything in their personal bank account could be called on to settle the outstanding debt. If you co-own your home, with a spouse or partner – they will also have to sign the guarantee.

Most guarantee forms require joint and several liability. This means that each individual who signs a guarantee can be liable for the whole amount of the loan.

Personal Guarantees can apply to a wide range of loan facilities including those available from P2P lending platforms – in fact at Purbeck, we see most of the demand for Personal Guarantee Insurance coming from the alternative finance market.

Signing a Personal Guarantee to secure access to funding can be daunting for a small firm. All the risk is on one or possibly a small group of individuals willing to put their homes and life savings on the line for the sake of their business. Indeed, in a survey we undertook last year, 29% of SMEs decided against taking out business finance because of the requirement to provide a Personal Guarantee.

How does Personal Guarantee Insurance Work?

Just like other types of insurance Personal Guarantee Insurance protects against the risk of the worst happening – in this instance the risk that your business fails and the guarantee is called in by the lender. Insurance will offset any outstanding obligations called in with the level of cover based on a fixed percentage of the personal guarantee the company director wishes to insure. This is dependent on whether the corresponding finance facility is secured or unsecured.

How Personal Guarantee Insurance Helps Businesses in Financial Distress

The big difference between Personal Guarantee Insurance and other types of insurance is the mentoring support available as part and parcel of the cover to help prevent business failure. This has been invaluable to many of our customers during the pandemic.

Before signing a Personal Guarantee

  • Always get some independent advice – your accountant, solicitor, commercial broker or financial adviser can all help you work out what is right for your business and advise on the ways you can cut the personal risks you might face by signing a personal guarantee.

  • If you run your business with co-directors, come to an agreement to share the guarantee.

  • Negotiate a time limit for the guarantee and a cap on the amount, but do remember interest and costs added to the debt can soon mount up.

  • Agree terms where you are guaranteeing a part of rather than the whole loan and that settlement is sought first from company’s assets before enforcing the guarantee.

  • Investigate Personal Guarantee Insurance. Purbeck is the sole provider of this type of insurance in the UK.

No-one goes into business expecting it to fail but sadly businesses do fail, often through circumstances they could not have predicted. Personal guarantee insurance can protect small businesses across the UK, giving owners and directors the confidence to access the finance they need without putting their personal assets at risk.

For further information call 0208 004 7250 or email