Talking to SMEs about personal guarantees.
A personal guarantee is not just a form to sign. It is a serious commitment that can make a director, shareholder or business owner personally liable if the business does not repay.
That does not mean personal guarantees are always wrong. They can help SMEs access funding. But they need to be explained clearly, calmly and honestly before anyone signs.
Quick summary
- A personal guarantee is a promise by an individual to support business borrowing if the company does not pay.
- It may be capped, uncapped, limited to one facility or drafted more widely.
- The business owner should understand what triggers liability and what the guarantee covers.
- Personal guarantees are common in parts of SME finance, but they should never be brushed off as "standard paperwork".
- The right conversation is factual, balanced and direct.
The business problem
Many SMEs need funding before they have a strong balance sheet, substantial assets or a long trading record. That is especially true for growing businesses. They may have good customers, rising sales and a real opportunity, but not enough retained cash or available security.
That creates a gap. The business wants funding to move forward. The lender wants comfort that the money will be repaid.
A personal guarantee is one way lenders try to reduce that risk. For the business, it may open the door to funding that would otherwise be difficult to obtain. For the individual, it creates personal exposure.
Both points matter. The conversation should not pretend otherwise.
What is a personal guarantee?
A personal guarantee is a promise from an individual to repay business borrowing if the business does not. The guarantor is often a director, shareholder or owner.
The guarantee may support a loan, overdraft, asset finance agreement, invoice finance facility, trade finance facility, lease or revolving credit line.
It may cover the debt only, or it may also include interest, default interest, costs, fees and enforcement expenses. Some guarantees are capped at a stated amount. Others are wider. Some are supported by a legal charge over personal assets. Others are unsecured but still serious.
The detail is the point. "There is a PG" is not enough information.
Why lenders ask for them
Lenders may ask for a personal guarantee where the business is young, asset light, thinly capitalised, already secured to another lender or asking for more risk than the company balance sheet can support.
The lender may also want owner alignment. In plain English, if the lender is taking risk, it may want the owners to stand behind the business too.
That is not automatically unfair. But the request should be proportionate, properly explained and understood.
Why SMEs worry about them
A personal guarantee moves the conversation from company risk to personal risk. That is why owners ask direct questions.
- Could I lose personal assets?
- Is my home at risk?
- What happens if the company fails?
- Can the lender pursue me before the company?
- What if another director causes the problem?
- What happens if I leave the business?
- Does it cover future borrowing?
- Can I get released later?
These are not awkward questions. They are the right questions.
The regulatory and market context
Personal guarantees have been a live issue in UK SME finance. The Federation of Small Businesses submitted a super complaint to the FCA in December 2023 about the use of personal guarantees in SME lending.
The FCA later noted that much SME lending sits outside its remit, including lending to limited companies and many business loans above £25,000. It also said personal guarantees are expected to be more common in unregulated business lending, particularly lending to limited companies.
The FCA's follow up work found no evidence of harm in the limited regulated part of the market it reviewed that would justify further supervisory activity or new guidance. It also identified practices firms may want to consider, including post contractual information for guarantors and setting a level below which a personal guarantee would not be taken.
That is a balanced position. Personal guarantees are not banned. They are not automatically abusive. But they need to be handled properly.
How to talk about a personal guarantee
Use plain English. Do not dress it up.
| Avoid saying | Say instead |
|---|---|
| It is just standard security. | If the business does not repay, the lender may be able to claim against you personally, depending on the terms of the guarantee. |
| Everyone signs these. | Personal guarantees are common in some types of SME lending, but you should understand exactly what you are signing. |
| It probably will not happen. | The guarantee becomes relevant if the business cannot meet its obligations. You need to understand what could happen in that situation. |
| It is only a formality. | It is a legal commitment. You should read it carefully and take advice where appropriate. |
This is not about scaring people. It is about respecting them enough to explain the risk properly.
The key points to explain
Is it capped?
A capped guarantee limits exposure to a stated amount, although the wording may allow interest, costs or enforcement expenses on top. An uncapped guarantee can create wider exposure. The guarantor should know the exact position.
What borrowing does it cover?
Some guarantees support one facility only. Others may cover all money owed to the lender, including future borrowing. The guarantor needs to know whether the guarantee is specific or wider.
When can it be called?
The guarantee may become enforceable if the business defaults. Default can include missed payments, insolvency, breach of covenant, failure to provide information, loss of security, misrepresentation or other events set out in the agreement.
Does the lender have other security first?
The lender may hold company security, such as a debenture, invoice security, asset security or property security. The guarantor should ask whether the lender must pursue company assets first, or whether it can pursue the guarantor directly.
Can it be released?
A director should not assume that leaving the business releases them. Release usually needs to be agreed formally by the lender. This should be checked at the start, not when the relationship has already changed.
Where a personal guarantee may be reasonable
A personal guarantee may be reasonable where the business genuinely needs funding, the product fits the need, the guarantee is proportionate, the amount is capped, the repayment route is clear and the owners understand the risk.
For example, a profitable business may use a personally guaranteed loan to fund a new contract where the margin is strong, the customer is credible and the repayment route is clear.
When another situation fits better
A personal guarantee becomes much more concerning where the business is borrowing into ongoing losses, the repayment source is vague, HMRC arrears are growing, records are poor, directors disagree, or the individual could not cope with the guarantee being called.
The problem is not the existence of the guarantee. The problem is taking personal risk without a realistic plan for repayment.
Costs, risks and watch outs
Watch for unlimited guarantees, all monies wording, joint and several liability, guarantees covering future facilities, personal asset security, lack of release wording, default interest and lender legal costs.
Joint and several liability is particularly important. Depending on the drafting, each guarantor may be liable for the full guaranteed amount, not just their share.
The guarantor should also understand whether the guarantee survives refinancing, facility increases, changes in ownership or changes in their role in the business.
Questions to ask before signing
- Is the personal guarantee capped?
- What exact amount could I be liable for?
- Are interest, fees, costs and enforcement expenses included?
- Does it cover only this facility or all money owed to the lender?
- Is it joint and several with other guarantors?
- What events could trigger enforcement?
- Does the lender have to pursue company assets first?
- What security is the lender taking from the business?
- Is my home or any personal asset being charged?
- Can the guarantee be reduced over time?
- How do I get formally released from it?
- What happens if I leave the business?
- Should I take independent legal advice?
- Are there funding options that avoid or reduce the guarantee?
- Is this funding supporting growth, survival or both?
What lenders will check and why
Lenders may review director identity, ownership structure, Companies House filings, bank statements, filed accounts, management accounts, personal asset and liability statements, existing borrowing, HMRC position, aged debtors and creditors, customer concentration, security already granted, credit history and forecasts.
The lender is checking affordability, repayment, security and whether the guarantor has the capacity to support the guarantee if needed.
Most SMEs are honest. But a small number of bad actors manipulate applications, inflate values, hide liabilities or create false comfort for lenders. That makes funders more cautious and increases due diligence for everyone else.
Final practical summary
Personal guarantees should be discussed directly, not hidden behind phrases like "standard terms".
They can help SMEs access useful funding, especially where the business is growing, asset light or short of security. But they create real personal risk and should be understood before signing.
A good funding conversation does not pretend the risk is not there. It explains the risk clearly enough for the business owner to make a confident decision.
Sources and further reading
- FCA, Follow up work on FSB super complaint on personal guarantees
- FCA, Response to FSB super complaint requiring personal guarantees for business loans
- Federation of Small Businesses, super complaint on personal guarantees
This article reflects current Juno Funding editorial. Funding products, rates and lender appetite change frequently — figures are indicative only and should not be treated as advice.