Personal Guarantees from Directors on Business Credit Accounts

What a personal guarantee commits a director to

A personal guarantee (PG) is a legally binding commitment by an individual — usually a director or shareholder — to pay a debt or perform an obligation if the company fails to do so. Once called, the lender or creditor can pursue the guarantor's personal assets: bank accounts, property (subject to any charging order), and future earnings.

The limited liability protection that a limited company provides does not apply to obligations personally guaranteed. Directors who sign PGs are effectively co-borrowers for the covered amount. This is a significant personal financial commitment and should be entered into with full understanding of the terms.

Common scenarios where a PG is requested

Personal guarantees are commonly required by: commercial lenders on business loans and overdrafts, landlords on commercial leases, trade suppliers extending credit to early-stage companies, and invoice finance providers. They are less common for well-established companies with strong balance sheets, where the company's credit standing alone is sufficient.

• Start-ups and early-stage companies with limited trading history
• Companies with negative net assets or thin equity
• Businesses in sectors with high failure rates
• Where the facility amount is large relative to the company's net worth

Key terms to scrutinise before signing

Not all PGs are equal. Before signing, examine: whether the guarantee is unlimited or capped at a specific sum; whether it is joint and several (meaning each guarantor is liable for the full amount, not just their share); whether it is continuing (covering future debts as well as current ones) or limited to the current facility; and what events trigger the creditor's right to call on the guarantee.

Also check for indemnity clauses — these are drafted more broadly than pure guarantees and can extend liability even where the underlying debt is legally unenforceable. A solicitor should review the wording before you sign a substantial guarantee.

Negotiating limits and protections

A PG is a negotiating point, not a fixed requirement. Directors can and should negotiate: a cap on the guaranteed amount (e.g. limited to 12 months' facility value), a 'time limit' after which the guarantee expires if the company maintains good standing, a requirement for the creditor to exhaust remedies against the company before pursuing guarantors, and release of the guarantee on change of directorship.

Some creditors will not move. Others — particularly trade suppliers extending credit for the first time — may accept a reduced or time-limited PG rather than no PG. The negotiating leverage depends on how much the creditor needs your business. Confirm your position and the final terms with a solicitor before execution.