Masterclass: how to handle a Personal Loan Guarantee

In a survey of 1000 small business owners by Purbeck Personal Guarantee Insurance, just 33% understood what it means to be a personal guarantor. It is vital that business owners and directors fully comprehend the risks of signing a personal guarantee and more importantly, how to mitigate them. It means they can shop from a better choice of loan products and take on new finance with a greater degree of confidence.

So what is a personal guarantee?

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

If the personal assets aren’t sufficient to cover the debt, the business owner could face bankruptcy which would have long term ramifications and stop them from being a company director in the future.

A minority stake holding in the business won’t offer protection as a lender will go after whoever has the most chance of settling the debt.

What type of finance requires a personal guarantee?

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

How to cut the risk

Before deciding that signing a personal guarantee is right or wrong, business owners should get some independent advice. An accountant, solicitor, commercial broker or financial adviser can help work out the best options for the business and advise on the additional ways the personal risks can be cut when signing a personal guarantee.

Come to an agreement to share the guarantee with co-directors. In this way the risk is not just being shouldered by one person

Work out with the lender if a time limit can be agreed for the guarantee and a cap on the amount but bear in mind that interest rates are rising and costs added to the debt can soon mount up.

Investigate if part of the loan rather than the whole loan is guaranteed and that settlement of the debt is sought first from company’s assets before enforcing the guarantee. Clearly in this instance the business owner will need to show what assets within the company could be used – this could be machinery, tools, computer equipment.

Finally, consider Personal Guarantee Insurance to mitigate the risk. This means if the business does fail, 80% of the loan will be settled by the insurance rather than the business owner’s home, savings and other personal assets being called on to settle the debt.

The level of cover is 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.

Policyholders are also offered access to free mentoring and support services if the business gets into financial distress, plus expert guidance at the point the debt needs to be settled.

The research from the Federation of Small Business on business demand for finance chimes with our own research. While raising prices and cutting energy use are the main measures being applied to manage costs, 29% of small businesses are looking for some form of new finance. Whether it’s funding to start, sustain or grow a business, a Personal Guarantee will almost certainly be part of the loan agreement and business owners need to be prepared.