Personal guarantees for business borrowing: what directors need to know

A personal guarantee is a legal commitment by a director or business owner to personally repay a business debt if the company itself can't.

Personal guarantees for business borrowing are common when lending to smaller or newer companies that don't have other assets to offer as security. They shift some of the lender's risk from the business onto the individual standing behind it.

If you’re a director weighing up whether to sign one or looking for help with personal guarantees you’ve already given, the most important questions are usually the same. These include what exactly is being promised, how enforceable it is and what happens if things go wrong.

What is a personal guarantee

In short, a personal guarantee is a promise from a director, owner or sometimes a connected party that they'll cover a business debt personally if the company defaults and can't repay it.

Signing a guarantee doesn't itself affect your personal credit score, but defaulting on the underlying debt afterwards can.

Are personal guarantees enforceable?

Personal guarantees by directors are legal contracts intended to be enforceable. Whether a particular guarantee holds up in practice depends on how it was executed and the circumstances around signing it.

A properly executed guarantee may be enforceable where the terms are clear and the guarantor understood what they were agreeing to. But, their enforceability depends on the circumstances of each case, and a guarantor may be able to challenge a guarantee on certain grounds.

• The guarantee wasn't properly executed: A guarantee may not have been completed in the legally required way. For example, not being signed correctly or witnessed as a deed, where required.

• Undue influence: Improper pressure or manipulation that forces a person to provide their signature - for instance if a connected party, such as a spouse, signed without independent benefit or advice.

• Misrepresentation: This could involve being given a misleading impression about what was actually being agreed to.

• Unclear drafting: The terms of the guarantee may be ambiguous or unclear about the obligations being undertaken.

This is general information, not legal advice. Whether a personal guarantee is enforceable in your specific case depends on its own facts, so get independent legal advice on your own situation before assuming either way.

If you're asked to give a personal guarantee

A personal guarantee is a significant commitment for a director, so it's worth taking a few practical steps before signing one. These can help you understand the extent of your obligations and consider whether the terms are appropriate for your circumstances.

• Read the guarantee terms carefullyPay particular attention to what counts as an "event of default" and when this could trigger the guarantee.

• Get independent legal advice before signingThis is particularly important if you're a connected party, such as a spouse, rather than the business owner yourself.

• Ask whether the guarantee can be limitedIt may be possible to cap it at a set amount, limit it to a specific period or have it released once certain conditions are met. Terms can sometimes be more negotiable than directors assume.

• Consider personal guarantee insuranceThis is a category of cover that some directors use to help mitigate the personal financial risk, although the terms and costs vary between providers.

Taking these steps before signing can help you understand the commitment you're making and the potential personal risk involved.

If a personal guarantee is already being enforced against you

If a personal guarantee is being enforced against you, don't ignore enforcement letters or a statutory demand. Acting quickly can help you understand your position and what options may be available to you.

Get independent legal advice as soon as possible. Enforcement of a personal guarantee is genuinely time-sensitive. 

A solicitor experienced in this area can advise you on:

• How to respond

• Clarify if the guarantee was properly executed or not 

• Establish next steps you can take

It is advised to understand your options as soon as possible and respond appropriately before the situation progresses further.

How Funding Circle can help

Funding Circle asks for a personal guarantee from directors or shareholders on its lending products. 

Read What you need to know about personal guarantees for more information on how personal guarantees work and what to consider before giving one.

FAQs

What is a personal guarantee?

A personal guarantee is a legal commitment by a director or business owner to personally repay a business debt if the company can't.

It's commonly used when a business doesn't have other security to offer. It means a lender may be able to pursue the individual guarantor if the debt isn't repaid.

Are personal guarantees enforceable?

Generally, personal guarantees are legal contracts intended to be enforceable. 

Whether a specific guarantee is enforceable depends on how it was executed and the circumstances around signing it, so independent legal advice is important if you're unsure about your position.

Can a personal guarantee be challenged?

Yes, in certain circumstances. Guarantors have challenged personal guarantees on grounds such as improper execution, undue influence, misrepresentation or unclear drafting, although whether any of these apply depends on the specific facts.

A challenge isn't necessarily successful even where one of these issues is present, which is why independent legal advice on the specific guarantee is important.

What happens if I can't pay under a personal guarantee?

If a personal guarantee is being enforced against you, don't ignore enforcement letters or a statutory demand. Get independent legal advice as soon as possible so you can understand your position and what action you may need to take.

Acting quickly can help you understand your options before the situation progresses further.

Disclaimer

28/09/26 – While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.