A guide to personal guarantees when seeking funding

As of Q1 2024, there has been a 49% increase in the number of small business owners requesting personal guarantee insurance. This indicates a rise in the number of lenders requesting personal guarantees from their business borrowers. Interestingly, this increase is seen more among established businesses, who saw a 21% increase in PGI applications, compared to businesses who have been trading for under 2 years, who saw a 29% decrease in Q1 2024.

So, if you’re one of the business owners being asked to put up a personal guarantee, and you’re wondering what that means for you and your business, read on. We’ve put together a short guide to personal guarantees for business owners seeking funding. 

What is a personal guarantee? 

A personal guarantee is an agreement between you and a lender that says you're committed to repaying the loan even if the business is unable to. 

As an illustration, it’s possible you may have been asked to get a personal guarantee from a parent or guardian when looking for a rental property as a young student. A personal guarantee for businesses is similar to that, but it’s you as the owner saying you’re happy to pay this even if your business becomes insolvent. 

You might be asked to guarantee the full amount, meaning you’re liable to repay the full funding, but you could also be asked to guarantee your commitment to repay only a percentage of the loan instead. 

Why are personal guarantees used? 

A personal guarantee is usually the lender's way of mitigating their risk. They’re taking a risk by lending you money, as there’s a chance the money won’t be returned to them. The personal guarantee tells them there's a source they can turn to even if the business becomes insolvent or doesn’t pay its debts. 

Another way lenders hedge their debts is by providing secured funding rather than unsecured funding – essentially, an asset is used as security for the loan. This is why personal guarantees are often requested when borrowers apply for unsecured business loans. 

If your business is in its early stages and has a limited history with credit, a personal guarantee can be a way to access funding that might otherwise be inaccessible. 

Benefits of using a personal guarantee 

There are several reasons business owners and directors decide to agree to a personal guarantee, including some of the following. 

Easier approvals 

A personal guarantee can help make the lender feel more comfortable with the idea of extending funding, potentially making them more likely to approve a loan application. 

Better interest rates 

While not a hard and fast rule, in general, the less risk to the lender, the better the interest rates. 

Support cash flow 

A personal guarantee can help businesses gain access to funding with greater ease, and that funding can then be used to support cash flow and enable growth. 

Risks and drawbacks of using a personal guarantee 

A personal guarantee brings your personal name into the equation. This can mean that if your business becomes insolvent or stops paying its debts, and you become liable for the debt, not meeting the repayment obligations can have a direct impact on your credit score, ability to borrow further funding, and even your personal assets. 

Should you agree to a personal guarantee? 

Whether you should sign a personal guarantee depends on your personal circumstances and the terms of your funding agreement. 

Here are a few considerations and scenarios. 

Firstly, you shouldn't agree to a personal guarantee until you’ve ensured you fully understand the terms and implications. Feel free to ask the lender to clarify certain terms, for instance, how much of the loan you’re guaranteeing, what exactly will happen if your business defaults on the loan, and what your repayment terms are.

Secondly, consider your own affordability thresholds. If your business defaults or is made insolvent, will you be able to repay the debt under the currently agreed terms? 

Lastly, remember to factor in personal guarantee insurance. These insurance plans can help you pay back the debt in the case of a business default. Get a few quotes for this service in advance of agreeing to a personal guarantee so you know how much you’ll need to budget for with regards to your monthly premiums.  

What to do if you don’t want to agree to a personal guarantee 

Does the thought of agreeing to a personal guarantee make you uncomfortable? That’s okay. Everyone has different thresholds for what they’re happy with when it comes to business and personal finance. If a personal guarantee just isn’t on your to do list for this year, here’s what to do instead. 

Negotiate 

Go back to the lender and let them know this isn’t something you’re comfortable with. Consider what you might be happy with instead. For instance, perhaps you wouldn’t mind paying higher interest rates, are happy to put up a deposit for the loan, or are comfortable with the idea of using an asset as collateral. 

Shop around

You could also try searching for other lenders to see if anyone else is better suited to your needs. A broker like Funding Options by Tide could help here. We work with over 120 lenders and help facilitate up to £20 million in finance. If you’d like to see if any of the lenders we work with could be suitable, just submit your information here and when our team gets in touch, let them know you’re looking for funding that doesn't include a personal guarantee. They should be able to tell you if you’re eligible for finance and if so, what terms might be required of you. 

Seek alternative funding sources 

A business loan isn’t the only type of funding you can choose from. There are many alternative types of funding, including:

• equity finance – when an investor purchases a share of your business

• merchant cash advances involve trading an upfront sum for a percentage of future earnings

• invoice finance – selling or borrowing against unpaid invoices 

If you’re struggling to find business finance that suits your needs, you could consider one of these sources of finance. 

Find business finance with Funding Options by Tide

Whether you’re happy to agree to a personal guarantee or you’d prefer not to, you can use our free checking service to find out if you’re eligible for funding and if so, how much you can hope to gain access to. Just submit your information using the link below to find out if you’re eligible for up to £20 million in business finance. 

Find business finance.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.