What is a personal guarantee?
A personal guarantee is a written promise to a lender that you will be personally liable for paying back a debt.
Normally, if your business is incorporated (when you’re a limited company or in a limited liability partnership), you won’t be personally liable for any debts your business takes on.
However, a personal guarantee changes this by making you legally obliged to repay the debt out of your personal finances if your business cannot.
Why are they necessary?
Essentially, they help to demonstrate to a lender that you’re confident you’ll be able to pay the debt off. If you weren’t confident, it’s unlikely you’d feel comfortable signing a personal guarantee.
Lenders tend to ask for personal guarantees when there’s an increased risk to them. For example, they’re quite common for short-term, unsecured lending, where funds are borrowed over a short period of time and no assets taken as security.
Are there different types of personal guarantee?
There are two main types of personal guarantee:
- Supported – Supported personal guarantees are secured against an asset that you own. For example, this could be your home
- Unsupported – Unsupported personal guarantees aren’t secured against an asset at all
Is it worth the risk?
Whether or not signing a personal guarantee is worth the risk is entirely up to you and your business’s situation. If your business is healthy and you’re confident you’ll be able to pay back the loan on time, you’re probably safe to go ahead and make a guarantee.
However, if you’re not certain you’ll be able to pay the money back or if your company’s financial situation isn’t secure, it’s probably going to be a bad decision.
Personal guarantees – if executed correctly – are legally binding, and they could leave you in an awkward position if your business isn’t able to make the repayments.
You can mitigate against the risk of signing one by getting personal guarantee insurance.
Can I make a personal guarantee to Boost Capital?
Yes, we always ask for a personal guarantee when you take out a loan. This is because our loans are unsecured, so we don’t need you to put any assets forward as collateral.