Guarantors and Personal Guarantees for Business Loans

Businesses can always do with extra money. Whether it's startup loans to get going in the first place or an extra injection to fund growth and development, an entire industry has built up around ensuring that companies have financial liquidity when they need it. But the financial institutions that lend this money need to know that it’s going to be repaid, and that’s when guarantors come in.

Personally guaranteeing a loan to your company comes with significant benefits. It can unlock access to lending that your company might not otherwise have been considered suitable for, and sometimes at better terms. But it also comes with a degree of risk, and if you’re considering making a personal guarantee for a business financing it’s better to be forewarned over what you might be signing up for.

Key Components of Business Loans with Guarantors

The purpose of a guarantor in a business loan context is to mitigate risk for the lender. With the extra safety net of being able to hold a guarantor liable for a business debt if the business itself doesn’t pay money that it owes, lenders have greater freedom to lend money to businesses that may otherwise constitute a risk, and in some cases to even lend greater amounts of money, and at more favourable terms. Business loans without personal guarantees will likely be capped at lower amounts, and will almost certainly also come with higher interest rates.

Responsibilities and Implications of Being a Guarantor

It is important to understand that becoming a guarantor comes with legal and financial responsibilities. By agreeing to become one, you are agreeing to assume the responsibility for repayment if your business is unable to. Should you personally be unable to meet the same obligations that were expected of your company in the first place, you’ll be at risk of further action from your creditors. Your credit score could be affected, and the matter could end up going as far as personal bankruptcy. With this in mind, it is strongly advised that you seek independent legal advice before agreeing to act as one for your business.

Types of Business Loans That Require Guarantors

There will always be scenarios in which your company’s financial records will be insufficient to allow a lender to make an informed decision over whether to lend to your business or not. This occurs most commonly with new businesses and startup loans, businesses which do not have complete business records, or in cases in which directors already have poor credit histories. This doesn’t only apply to business loans, either. Other forms of lending, borrowing or leasing, such as invoice finance agreements, asset leasing arrangements, property leases or trade supplies, could all require personal guarantees or indemnities.

And there is a difference between these two forms of security. A personal guarantee isa promise made between the guarantor and the lender, in which the guarantor promises to repay any monies that the company does not repay itself. An indemnity, on the other hand, is a promise to be responsible for another person’s loss and to compensate them for that loss. You may be required to provide a guarantor and an indemnifier, or you could be considered growth.

Business Loan Guarantor Eligibility and Criteria

To be considered eligible to be a loan guarantor, you’ll need to be at least 21 years of age, with a good credit history and all of your current debt obligations up to date. It will support your case if you have liquid assets–that’s to say, assets which can quickly be converted into cash such as stocks and shares or money held in a savings account–or property. You will have to be underwritten in the same way as if you were applying for a personal loan yourself, so make sure that you have all the normal documents required for such an application if you decide to act as one for your company.

Benefits and Drawbacks of Personal Guarantees

The benefits of personal guarantees don’t end with being approved for a business loan in the first place, although they have become increasingly commonplace across the board since the financial crash of 2008. Personal guarantees may unlock higher amounts for you to borrow, and longer terms for repayment. Interest rates may be lower. Personal guarantees, which aren’t usually tied to one particular asset, may also offer greater flexibility further down the line.

But there are obvious drawbacks to them, as well. The ultimate risk for the loan shifts to the guarantor should your business run into financial difficulties, and while a company’s financial position might appear rosy at any particular moment in time, there are no guarantees that this will remain the case in perpetuity. With this in mind, you must give very careful consideration before entering into any such agreement.

Business Loan Guarantors in the UK: Understanding Legalities

Understanding the legalities of such arrangements is of the utmost importance. Your legal liability will depend on the wording of the guarantee itself. It is imperative that before becoming a guarantor you read and understand the document you are signing.

It may not be as simple as guaranteeing the principal loan. Guarantees can also create liabilities for administration charges, interest and costs of recovery in the event of default. A guarantor can also still be held liable even if the guarantor has lost their job, fallen ill or has been made bankrupt.

There may also be occasions upon which a guarantee is not legally enforceable, such as the guarantee being the product of fraud, negligent misrepresentation or undue influence, the primary agreement being varied without the knowledge of the guarantor, or the guarantor not being made aware of material factors that might affect the relationship between the creditor and borrower.

How Does Being a Guarantor for a Business Loan Affect My Personal Credit Score?

Being a guarantor in itself will not show on your credit report, but should the business get into trouble and find itself unable to repay what it owes and should you also have difficulty in repaying them, this may negatively affect your credit score. County Court Judgements and bankruptcies are a matter of public record, and in that extreme eventuality, both would be recorded on your credit history.

Can a Business Loan Guarantor Be Held Liable for the Entire Loan Amount?

The level of assurance won’t always be the same as the loan amount. With some types of borrowing, the personal guarantee could be as little as 20% of the loan amount, with other lenders asking for the full amount. Personal guarantees will also differ depending on whether you take out a secured or unsecured loan.

Is a Personal Guarantee Necessary for Small Business Loans?

Loans vary widely in amount, terms, and repayment period. The security required on each loan will vary between applications. Security can include any combination of a personal guarantee and assets owned by the business. The level of security will always depend on the loan amount, the purpose of the loan, and the repayment schedule. The decision as to whether a guarantee is required will be based on a combination of the applicant’s credit score, the amount loaned, and the legitimacy of the business projection.

What Steps Can a Guarantor Take to Protect Themselves in Case of Default?

There are steps that a guarantor can take to limit their liability if your business defaults on a loan. Personal guarantee insurance is designed to give you the confidence to grow your business through securing finance and protecting your assets, and policies are usually tailored to fit your exact circumstances.

Many unforeseen circumstances can have adverse effects on your business and your bottom line, from market downturns and key customers going out of business to suppliers failing in their duty and illness or absence of a key individual within the company.

Business is about taking risks, and there will be times when you have to take some yourself, whether that’s to get your company off the ground in the first place or to expand it, if growth will reap rewards for you in the future. But with risk can come significant reward, and if you’re confident that your business will grow as you anticipate a personal guarantee can open doors that would previously have been bolted shut and offer you terms that might not have been made available to you otherwise. With the right legal advice and sound financial management, they can save you money and help you take your business to the next level.