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What are the pros and cons of signing a personal guarantee for small business funding?

Posted by Todd Davison on Aug 16, 2018 2:06:21 PM

There’s no let-up in lender demand for personal guarantees as security for small business loans.  So faced with this Hobson’s choice and a future that’s predictably uncertain, what are the pros and cons of signing that guarantee? 

On the plus side…

You’re significantly more likely to get that loan!  You may well reach the conclusion it’s a risk worth taking to get that finance for business growth and give it a new lease of life.  If you do, it may be possible to negotiate the percentage of the loan you should guarantee.  At the very least, make sure you’re armed with all the facts and potential risks of signing a personal guarantee.

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 On the risk side…

No matter how optimistic you are about the future prospects for your business when you sign a personal guarantee, a whole host of factors can scupper your plans, from the economy and late payment to legislation.

If things do go wrong and a claim is made under the guarantee, you and any other guarantors will be liable to pay the company’s debt and all your personal assets will potentially be on the line.  If your personal assets don’t cover the debt, you may be made bankrupt. 

A minority stake holding in the business won’t protect you either.  

Read our related blog: Considering raising finance for your business?

Also, be aware that interest levels on large debts can soon escalate. All of this pressure can put intense strain on family relationships, especially if spouses have co-signed the guarantee.

It may be possible to negotiate out of a personal guarantee, but the process is difficult.

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These are real risks, but if you do decide to go ahead and sign the guarantee they can be cut significantly by taking out insurance which incrementally mitigates against potential financial loss over a three year period - up to 80% of the cost of the debt.  

Some finance brokers are now insisting small business owners should take out insurance as a condition of negotiating funding.  Rob Carter of Synergy Commercial Finance said:  “Personal guarantee insurance offers clients a vital de-risking tool to avoid the worst of potential personal guarantee pitfalls and that’s a welcome reassurance for them and the lender.” 

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