If you run a limited company and you have borrowed, or tried to borrow, you have almost certainly been asked to sign a personal guarantee. For unsecured lending to small companies, it is close to universal.
A personal guarantee is a legally binding agreement that makes you personally liable for the company's debt if the company cannot repay it. The limited liability that your company structure normally provides does not apply to that debt. If the business fails owing money, the lender comes to you.
This matters more right now than usual. The government has just announced a £6.5 billion expansion of the Growth Guarantee Scheme, which means more guaranteed lending, more directors signing guarantees, and most of them signing without reading past the first page.
The Three Types, and Why the Difference Matters
Not all personal guarantees are the same, and the differences are worth thousands of pounds.
An unlimited guarantee makes you liable for the full outstanding balance, plus interest, plus the lender's recovery costs, with no ceiling. If the company owes £150,000 and enforcement adds £20,000 in costs, your exposure is £170,000. This is the most common form on smaller facilities.
A limited guarantee caps your exposure at a fixed sum or a percentage of the facility, sometimes as little as 20 per cent of the loan. A £50,000 cap on a £200,000 facility means £50,000 is your maximum. At least in principle. More on the catch below.
A joint and several guarantee applies where multiple directors sign. Each of you is individually liable for the whole debt, not your share of it. The lender can pursue whichever guarantor has the most recoverable assets and leave that person to chase the others. If you own a house and your co-director rents, read this clause twice.
Joint and several is the standard lender position, but not the only outcome available. We have seen guarantees apportioned between directors or persons of significant control so each carries a defined share, and in one case a major shareholder who took no part in running the company, a director's elderly mother, was excluded from the guarantee entirely. If the shareholding and the day-to-day running of the business do not line up, raise it before anyone signs.
Related reading: if things have already gone wrong, see what actually happens when a business loan gets declined, and for the underwriting side of the picture, understanding credit checks.
The Government Guarantee Misconception
Here is the mistake that catches directors out, and it is going to catch more of them as the Growth Guarantee Scheme expands.
The scheme provides the lender with a 70 per cent government-backed guarantee. That guarantee protects the lender, not you. Scheme rules leave personal guarantees at each lender's discretion, and the lender must complete its normal recovery process against the borrower and any guarantors before it can claim on the government guarantee. The government backing makes lenders no gentler on guarantors, and several major banks state it plainly in their scheme terms: guarantors remain fully liable irrespective of the government guarantee and any money the lender receives through it.
One borrower protection is hard-wired into the scheme, and most borrowers have never heard of it: a lender cannot take your principal private residence as security for a Growth Guarantee Scheme facility. A personal guarantee still exposes your wider assets if enforced through the courts, but the home carve-out is a scheme rule, not lender goodwill.
A government-backed loan is not a loan the government repays for you. It is a loan the lender was more willing to write because their downside is covered. Your downside is not.
What Actually Happens If It Gets Called
Lenders do enforce personal guarantees, particularly on smaller companies where the business itself has no assets left.
The guarantee survives liquidation. It is your personal obligation, separate from the company, so the lender pursues you regardless of what the insolvency process returns. The sequence starts with a formal written demand once the company has defaulted or entered insolvency. Some lenders demand immediately; others wait until the liquidation dividend is known so they can claim the true shortfall. If you cannot pay, enforcement runs through a County Court Judgment, then a charging order over property, an attachment of earnings order, or bankruptcy. For context, the average personal guarantee taken by lenders was over £157,000 based on 2024 insurance data.
Settlements are more common than most directors realise. Court enforcement is slow and expensive for the lender, so a credible early lump-sum offer with honest disclosure of your position often lands. Guarantees regularly settle at 30 to 50 per cent of face value where the guarantor engages early rather than going quiet.
One trap to know about. If the company is heading for insolvency and you quietly pay down the debt that carries your guarantee before it gets there, the liquidator can apply to have that payment unwound as a preference. The money goes back to the company and your guarantee is still live. Take advice before moving anything.
What Is Negotiable Before You Sign
More than most directors think. The guarantee terms in a first offer are a starting position, not a fixed part of the product. Some real examples of where lenders have moved:
- A £250,000 facility where an unlimited guarantee was negotiated down to a £75,000 cap, in exchange for a floating charge over the book debts.
- A business with multiple persons of significant control where the guarantee exposure was split between them rather than held jointly and severally.
- A guarantee reduced from £50,000 to £25,000 in exchange for a shorter loan term.
The pattern in all three: the lender gave ground because it got something back, whether security, structure, or a faster exit. Asking for a smaller guarantee with nothing in return rarely works. Turning up with a trade does.
Lender type matters too. Most alternative lenders will agree a capped guarantee. But read the cap carefully, because collection and enforcement costs usually sit outside it. A £75,000 cap that excludes recovery costs is not a £75,000 ceiling on what you can end up paying. That fine print is worth paying a professional to check before you sign, not after.
The leverage moment is before credit approval, while the lender still wants the deal. This is also one of the places a broker earns their fee. A broker who knows which lenders accept caps and which never move saves you from negotiating against a wall.
Personal Guarantee Insurance: What It Costs and What It Covers
Personal guarantee insurance exists, and most directors have never heard of it.
The mechanics: annual premiums typically run between 1.6 and 3.6 per cent of the guaranteed amount, depending on the loan type, the business's financial position, and your personal credit profile. A £100,000 guarantee at 2 per cent costs around £2,000 a year.
Coverage is stepped on unsecured facilities. It starts at 60 per cent of the guarantee in year one, rises to 70 per cent in year two, and reaches 80 per cent from year three, up to a maximum of £500,000. Secured facilities can be covered at 80 per cent from the outset, up to £750,000. The policy is written on a co-insurance basis, meaning you always carry a share of the risk yourself, and it renews annually rather than running automatically for the life of the loan.
It is not cheap, and it does not cover everything. But for a director whose family home is exposed under an unlimited guarantee, it converts an unlimited personal risk into a known annual cost. Take independent advice before relying on it.
Your Rights as a Guarantor Are Slowly Improving
Personal guarantees have been under regulatory scrutiny since the Federation of Small Businesses filed a super-complaint with the FCA in December 2023, arguing that guarantee demands were excessive and chilling investment.
The FCA's direct powers here are limited, because most lending to limited companies sits outside its remit. But the pressure produced movement. UK Finance published industry commitments on guarantee practice in 2024, and the Lending Standards Board updated its standards so that, from September 2025, lenders are expected to contact guarantors at least annually about the guarantees they hold.
That annual contact is more useful than it sounds. If your loan balance has halved since you signed, that conversation is your opening to ask for the guarantee to be reduced or released. Most directors never ask. The ones who do are negotiating from a far stronger position than they had on day one.
Before You Sign
Three things, none of them complicated.
Read the guarantee as a separate document from the loan. It is one. Check whether it is unlimited or capped, whether costs sit inside or outside the cap, whether it is joint and several, and whether it covers just this facility or all present and future borrowing from that lender. All-monies clauses exist and they are exactly as broad as they sound.
Ask what is negotiable before you accept the first draft, and think about what you can offer in exchange. The stronger your application, the more room you have, so it is worth getting your business into shape before you apply rather than negotiating from weakness.
And take independent legal advice on anything you do not fully understand. The cost of an hour with a solicitor is trivial against a six-figure personal liability.
If you are weighing up funding options and want to understand which lenders match your business before anyone runs a credit check, check your eligibility with Floka. It takes a few minutes, there is no credit check, and it will not affect your credit file.
The Floka Team
Business Finance Experts