What is a personal guarantee?
When you take out a loan for your business, it’s usually the business that’s liable for the loan. A personal guarantees gives the lender extra reassurance by making you personally liable for the loan if your business can’t keep up with the payments.
You can read more in our guide on personal guarantees.
What’s personal guarantee insurance?
It’s a relatively new product designed to protect business owners who have signed personal guarantees to get a commercial loan. With a personal guarantee insurance policy in place, sometimes up to 70% of the total cost they’d be liable for is covered.
How does it work?
Let’s imagine two business owners – Jeff and Sarah:
Jeff owns a garage and, struggling with cash flow, he took out a short-term business loan. He borrowed £25,000 over nine months. As part of the application process, he signed a personal guarantee.
Unfortunately, the loan wasn’t enough to help and his business experienced a downturn in sales. Unable to keep up with the remaining loan repayments, Jeff defaults on his business loan. Because he signed a personal guarantee, he’s now personally liable for repaying the debt.
Jeff didn’t buy personal guarantee insurance, so he has to repay the money from his own pocket.
Sarah owns a florist. She’s also been having cash flow problems, so she took out a short-term loan. She borrowed the same amount as Jeff over the same period. She also signed a personal guarantee as part of the application process.
Sadly, the loan wasn’t enough to help Sarah either – sales declined and she was forced to close the shop. Unable to keep up with the payments, Sarah also defaults on her loan. Because Sarah signed a personal guarantee too, she has to repay the loan from her own pocket as well.
But Sarah was savvy enough to buy a personal guarantee insurance policy, so the insurance company pays 70% of the amount she owes.
Are there any terms and conditions I should be aware of?
As with any insurance policy, you should make sure you read the terms and conditions carefully before you buy. Each provider will have their own terms and conditions, and it’s important to make sure you’re getting the cover you need.
A common exclusion is that you won’t be covered to make a claim if, at the time you bought the policy, you had a good reason to believe you would need to make a claim – for example, if you knew your company was about to default on a loan or enter an insolvency procedure.