In a nutshell: A personal guarantee is a common requirement for directors of limited companies seeking business finance, as it provides the lender with security by making you personally responsible for the loan if your company is unable to repay it. While this commitment carries personal risk – as it potentially exposes your personal assets – it is often the key to accessing the vital funding needed to launch or grow your business.
When you apply for business finance, the lender may ask for a personal guarantee. This involves putting your own assets (eg home or savings) on the line if your business can’t repay the loan.
Personal guarantees have become more common in recent years. In 2024, applications for personal guarantee-backed loans increased by 45% compared to 2023. In September 2025, the average guarantee stood at £165,000 – enough to potentially cause small business owners serious difficulty if things go wrong.
While a personal guarantee may feel like a necessary evil, it can help ensure your business gets the funding it needs to thrive. But if you’re not comfortable or able to take on that level of personal risk, there are other financing options to consider that don’t require you to put your personal assets on the line.
In this article, we’ll explain what a personal guarantee is, why lenders ask for them and how you could protect yourself or avoid them altogether.
What is a personal guarantee?
A personal guarantee is a legal agreement that makes you personally responsible for repaying a business loan if your company defaults. Unlike a standard business loan, where the lender can only pursue your company’s assets, a personal guarantee means your personal savings, property, or even future earnings, are used as security.
Lenders often ask for personal guarantees because small and new businesses are seen as high risk. If your business doesn’t have a strong trading history or valuable assets, a guarantee gives the lender extra security. It’s their way of making sure they’ll get their money back, no matter what happens with your business.
There are several different types of guarantees to be aware of:
Unsecured guarantees rely solely on your promise to repay. They’re riskier for lenders, so they often come with higher interest rates.
Secured guarantees are tied to a specific asset, like your home. If you default, the lender can then claim that asset to cover the debt. To learn more about the differences between secured and unsecured loans, read our guide on secured vs unsecured loans.
Joint and several guarantees mean that if you’re one of several guarantors, the lender can pursue any of you for the full amount – not just your share.
Limited guarantees cap your liability at a percentage of the loan (eg 20% instead of 100%). These are offered by some lenders but they’re rare and you’ll usually need to negotiate for them.
Unlimited guarantees make you personally liable for the entire loan amount, plus any interest, fees, and legal costs. This is the riskiest type of guarantee for you as the borrower.
Directors’ guarantees are personal guarantees specifically required from company directors. They’re common for limited companies and mean the director(s) are personally liable if the business can’t repay the loan.
It's important to bear in mind that a personal guarantee is a serious commitment that enables your business to access the necessary finance. By signing, you’re offering the lender an additional layer of security, but this comes with the obligation of becoming personally responsible for the loan if the company defaults. This means that, in a worst-case scenario, your personal assets – such as your home or savings – could be at risk. So you’ll need to assess the potential of the finance to drive your business growth against the level of liability you are undertaking.
How does a personal guarantee work?
When you sign a personal guarantee, you’re agreeing to cover the loan if your business can’t.
First, lenders will usually ask for a guarantee when your business doesn’t have enough assets or trading history to secure the loan on its own. Some lenders will ask for guarantees from all directors, not just one. This spreads their risk, but it also means multiple people could be personally liable.
If your business misses any repayments, the lender will typically give you a chance to catch up. But if you default (usually after 90 days or more) they can demand repayment from you personally. This could involve freezing your bank accounts, seizing assets, or even taking legal action. In the worst cases, it could lead to bankruptcy, which might disqualify you from acting as a company director in the future. But in general, lenders prefer to give you an opportunity to get back on track with loan repayments rather than going down the long and expensive legal route.
Most personal guarantees are legally binding, which means you’ll need to have the agreement witnessed by someone like a solicitor. This acts as a safeguard to make sure you understand what you’re signing. But if you’re unsure, it’s always worth getting independent legal advice before committing.
The benefits and risks of personal guarantees
Personal guarantees can help your business access funding when it wouldn’t qualify otherwise. But understanding both the benefits they unlock and the liabilities they can create is essential.
Benefits of personal guarantees
Access to funding: A personal guarantee can help you secure a loan when your business might not qualify on its own, particularly if it’s a start up or doesn’t own valuable assets
Better loan terms: Lenders may offer lower interest rates, higher loan amounts, or more flexible repayment schedules if you provide a personal guarantee
Builds business credit: Successfully repaying a guaranteed loan could improve your business’s credit score, making it easier to borrow in the future
Risks of personal guarantees
Personal risk: If your business fails, you could lose personal assets like your home, savings, or even future earnings
Impact on personal credit: Defaulting on a guaranteed loan could have a negative impact on your personal credit score, which could make it harder to get personal loans or mortgages in the future
Emotional stress: Knowing your personal finances are on the line can add pressure, particularly if your business faces cash flow problems
Long-term consequences: In the worst cases, defaulting could lead to legal action, bankruptcy, or even disqualification as a company director
What to consider before signing a personal guarantee
To make sure you’re making the right decision for your business and personal finances, consider the following before signing anything:
Review the terms carefully: Is the guarantee limited to a percentage of the loan, or are you liable for the full amount? Does it cover interest and fees as well as the principal? These details can make a big difference if things don’t go to plan
Assess the risk: Can your business realistically repay the loan? It might be helpful to have a backup plan ready, just in case
Seek professional advice: A solicitor or financial advisor can help you understand the fine print and spot any red flags. They could also help you negotiate better terms, such as a lower guarantee percentage or a shorter term
Consider personal guarantee insurance: This can offer some protection by reducing your exposure, although it won’t eliminate the risk entirely. Make sure you understand the policy’s terms and exclusions before you buy
Exploring your finance options
While some businesses may qualify for funding without one, it's important to know that a personal guarantee remains a core security requirement across many different types of business finance. Rather than assuming a personal guarantee is avoidable, you should focus on understanding the specific requirements for each product.
Invoice finance lets you borrow against your outstanding unpaid invoices. While the invoices provide security, most lenders will still require a personal guarantee, although it’s often capped (eg at up to 25% of the funding amount) rather than covering the full debt. This can be suitable if you have reliable customers but need cash flow support
Asset finance lets you spread the cost of equipment or machinery over time. The asset itself acts as collateral, but be aware that a number of asset finance providers still require a personal guarantee as additional security, particularly for smaller businesses
Revenue-based financing could be worth considering if your business is more established. With this type of funding, you repay a percentage of your monthly revenue until the loan’s cleared. It’s more flexible than a traditional loan and it doesn’t usually require a personal guarantee
Secured loans, including asset based loans, could be an option if your business has valuable assets. These loans are tied to a specific asset, like property or equipment, so the lender has security without needing a personal guarantee
Business credit cards can provide a flexible way to manage short-term expenses. Most business credit cards typically require a personal guarantee, allowing the lender to assess your personal financial history to support the line of credit. So just be mindful of higher interest rates and make sure you can meet the full repayments
The Growth Guarantee Scheme is a government-backed initiative that helps small businesses access finance. The scheme provides lenders with a 70% government guarantee on the outstanding balance, but most lenders will still require a personal guarantee from the director – although they’re unable to take your primary residence as security
How to negotiate a personal guarantee
Where personal guarantees are unavoidable, you might still be able to negotiate better terms.
Start by asking if the lender will accept a limited guarantee. This will cap your liability at a percentage of the loan (eg 20% instead of 100%). You could also try to shorten the guarantee term, so you’re only liable for a set period (eg two years instead of five).
Some lenders may also consider reducing the guarantee amount if you can offer other security, like business assets or a larger deposit. And, if your business has a strong trading history, you might be able to negotiate a lower interest rate or more flexible repayment terms.
Remember, lenders want to lend. So they’re often willing to be flexible if it means securing your business. Don’t be afraid to ask for better terms – just make sure you’re realistic about what you can afford.
Wrapping up
Personal guarantees can help you access funding when your business might not qualify otherwise. But they come with serious risks, so it’s important to understand what you’re signing up for.
If you do need to sign a guarantee, negotiate the best terms you can – and consider personal guarantee insurance for extra protection. If you’re unsure, seek professional advice. A solicitor or financial advisor can help you understand the risks and make an informed decision.
Ready to explore your financing options? Compare Tide’s business loans to find the right fit for your business.
FAQs
Do all business loans require a personal guarantee?
Not all business loans require a personal guarantee, but they’re becoming more common – particularly for start ups and small businesses.
Are personal guarantees enforceable?
Yes, personal guarantees are enforceable. If your business defaults, the lender can pursue your personal assets to cover the debt. This could include freezing your bank accounts, seizing property, or even taking legal action. If you’re worried or are struggling to keep up with repayments, speak to your lender immediately. They may be able to provide support such as offering payment holidays.
Is a personal guarantee the same as a director’s loan?
No, a personal guarantee is a promise to repay a business loan if your company can’t. A director’s loan is money you borrow from your business, which has different legal and tax implications.
Does a personal guarantee need to be witnessed?
Yes, you’ll likely need to have the agreement witnessed by someone like a solicitor since most personal guarantees are legally binding.
How does a personal guarantee affect my credit score?
A personal guarantee shouldn’t affect your credit score unless you default. If you do, it could damage your personal and business credit ratings.
Can I have multiple personal guarantees on one business loan?
Yes, lenders often require personal guarantees from all directors or major shareholders. This spreads their risk but increases yours, so make sure everyone understands their liability and seeks independent advice if needed.
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