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Personal guarantee

A personal guarantee (often shortened to PG) is a written promise by an individual — usually a director, member or shareholder — to repay a business's borrowing personally if the business itself fails to. It is a separate contract that sits alongside the main credit agreement. Its effect is to put the guarantor's personal finances behind the company's debt, so that if the company cannot pay, the lender can pursue the individual.

Who gives it: A director, member or owner of the borrowing business.
What it does: Makes that person personally liable for the company's debt if the company defaults.
What is at risk: The guarantor's personal assets — savings, and in some cases the family home where the guarantee is secured against property.
The alternative: Borrowing with no personal guarantee, where liability stays with the company alone.

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Why lenders ask for a personal guarantee

Because a limited company or LLP is a separate legal person, its directors are not normally liable for its debts. A lender that wants extra protection can ask for a personal guarantee to bridge that separation, so the individual's commitment is added to the company's. Guarantees are common in unsecured lending precisely because there is no asset taken as security, so the guarantee becomes the lender's fallback.

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What a personal guarantee exposes

A guarantor who signs a personal guarantee can be pursued for the outstanding balance, plus interest and costs, if the company defaults. This can mean personal savings, investments, and — where the guarantee is supported by a charge over property — the guarantor's home. Because the consequences are serious, anyone asked to give a guarantee should read it carefully, understand the cap (if any) on the amount, and ideally take independent advice before signing.

Lending without a personal guarantee

Some lenders extend business credit with no personal guarantee at all. The borrowing is then an obligation of the company only, and the directors do not take on personal liability. This is materially safer for a director, because a downturn in the business does not put personal assets at risk. The trade-off is that the lender carries more risk, which is reflected in the assessment and the cost of credit.