How do personal guarantees work in business financing?

Anyone looking to start their own business who doesn’t already have assets is likely to need a personal guarantee in order to secure a loan, but many people don’t know what they are.

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Legally binding agreement

A personal or director guarantee is a legal agreement between a loan provider and a business director or owner. It means that the company director promises to guarantee the repayment of any loan. If the business fails and defaults on the loan repayments, the guarantor is personally responsible for paying them.

They are normally needed for an unsecured business loan, as these are not linked to an asset like property and the lender wants to offset the high risks of lending to a small business.

What are the implications?

According to The Telegraph, if there is a default on a loan, the lender has the authority to take possession of any assets. This can include any savings, your car and your home.

In the worst-case scenario, a business owner who can’t repay their loan could end up bankrupt, which has a massive impact on their credit rating. Therefore, it is vital that you get professional legal advice from a specialist such as before agreeing to provide a personal guarantee.

There are risks, but a legal expert can guide you through the process. Also, you can lessen the risk by negotiating a cap on the level of debt you’d be liable for or taking out personal guarantee insurance.

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If you don’t want to give a personal guarantee, you could consider alternatives such as a secured loan, which uses your business assets as security, or a specialist lender who doesn’t require them for a small loan. You might also consider private investment, a government scheme or crowdfunding.

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