Personal guarantee business funding

Please note, this information is for general guidance only and should not be taken as financial advice. Always seek professional advice before making any financial decisions. Your capital is at risk.

Introduction

In the realm of business funding, securing a loan often involves more than just pledging business assets. Lenders frequently require personal guarantees from business owners or directors as an additional layer of security. This practice, while common, raises questions about its necessity and implications. Understanding the role and impact of personal guarantees in secured lending can help business owners make informed decisions and navigate their financial strategies more effectively. This blog delves into why personal guarantees are required, their benefits and drawbacks, and how they fit into the broader context of business funding.

What is a Personal Guarantee?

A personal guarantee is a legally binding agreement between a finance lender and a business owner or director, stating that the business owner or director will be personally liable for repaying a funding line if the business defaults on loan repayments or becomes insolvent.

The Role of Personal Guarantees in Lending

Personal guarantees help your business access funding it would not otherwise be able to secure by giving the lender comfort that they have recourse to an individual should problems arise. Providing a guarantee can also help you obtain better rates and terms, avoiding the need to give away equity.

Disadvantages of Personal Guarantees

Personal assets such as your home, car, savings, and investments can be used to settle business debts. If your business defaults on loan repayments and your personal assets aren’t enough to cover the debt, you may be declared personally bankrupt. While under bankruptcy restrictions, you cannot serve as a company director.

The Importance of Independent Legal Advice

Independent legal advice ensures that you fully understand the implications and responsibilities associated with the guarantee, helping you make an informed decision that aligns with your financial situation and goals. At Fresh Thinking Capital, we always insist that our clients obtain this advice to ensure they are fully informed.

Why Fresh Thinking Capital Requires a Personal Guarantee as a Secured Lender

At Fresh Thinking Capital, we strive to support businesses with flexible financing solutions. While we can provide property bridging, most of the funding we offer is for trading businesses looking to seize new opportunities.

Here’s why a personal guarantee is an important part of our lending process:

  1. Empowering Management Teams: As entrepreneurs who have owned businesses and raised finance, we understand that entrepreneurs want to be empowered to run their business with minimal interference from their funders. We get the comfort we need to be light-touch by taking a personal guarantee, ensuring that the guarantor is personally aligned with the borrowing entity. If plan A to repay us fails, the guarantor will work on plan B/C as necessary. This approach, we believe, is a cornerstone of why we have never had to enforce a facility, allowing borrowers the time they need to deal with any unforeseen problems.
  2. Demonstrating Commitment: A personal guarantee shows us that you are fully committed to the success of your business and to repaying the loan. This shared commitment builds a stronger partnership between us and you.

Conclusion

A personal guarantee should always be carefully considered, and independent legal advice sought by the guarantor, as their personal assets can be at risk. However, providing one can unlock funding and opportunities that would not be available otherwise. It is important when being asked to provide one to do your due diligence on the funder and understand how they work with their clients if things do not go according to plan. Will they give you the opportunity to deal with the problems, or will they look to enforce as soon as a default occurs? Allowing time to deal with the problem helps protect the borrowers’/guarantors’ equity.

It is a common requirement in the lending industry, designed to protect both the lender and the borrower. At Fresh Thinking Capital, we require personal guarantees because, regardless of how strong any asset or business is, we are essentially backing a management team to deliver. Providing a personal guarantee ensures all our interests are aligned, allowing us to provide you with the best possible loan terms and to ensure a strong, trust-based relationship.

If you have any questions or want to learn more about how we can support your business with flexible, short-term business funding solutions, please don’t hesitate to reach out. We’re here to help you navigate your financial journey with confidence and fresh thinking.