What Are the Risks of Personal Guarantees by Directors?
If you're a company director being asked to provide a personal guarantee for a business loan, you need to know how it affects your personal borrowing capacity and credit rating. Should the company be unable to pay, you personally risk losing your assets and potentially facing bankruptcy.
Key terms of the personal guarantee
- Guaranteed Amount: Is it a fixed sum, or does it cover all possible losses and future borrowings?
- Trigger Event: When can the lender demand repayment from you personally? Is it a single missed payment, any breach, or "on demand"?
- Grace Period/Notice: Will the company receive a notice period to rectify a missed payment before the lender pursues you? Is there any grace period for your personal repayment?
- Duration: Does the guarantee have a time limit, or can it be terminated when the debt is repaid, or you are no longer a director?
What is a Director's Guarantee?
A Director's Guarantee (often called a Personal Guarantee) is a legally binding agreement required by lenders when they provide financing, such as loans, overdrafts, or mortgages, to a limited company.
Because a limited company is a separate legal entity from its directors and shareholders, its liability is typically "limited." This means that in the event of insolvency, the company's debts usually don't extend to the personal assets of its directors.
Why do lenders need it?
To mitigate this risk, lenders require directors to sign a personal guarantee. This pledges that if the business fails to repay its debt, the director (or directors) will personally be responsible for that repayment from their own assets. This offers the lender an additional layer of security and often enables companies, particularly newer or smaller ones, to access funding that they might otherwise be unable to obtain.
If the company is unable to meet its repayment obligations, the lender has the legal right to pursue you personally for the debt. This could mean your savings, property (including your home), and other assets are at risk, potentially leading to severe financial repercussions, including bankruptcy, if you are unable to meet the demand.
Before proceeding with the purchase through a limited company, you must get Independent Legal Advice from a qualified solicitor.
SAM can help with this service for you and any additional directors, giving you peace of mind. Our panel solicitor will:
- Review the mortgage paperwork and guarantee.
- Facilitate a video conference meeting to provide Independent Legal Advice.
- Provide an advisory letter confirming that legal advice was given.
- Issue a certificate of advice to your acting conveyancer or lender (at their discretion).
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Why do directors take on Personal Guarantee risks?
Lenders are more willing to provide capital when personal assets back the company's debt, especially when the company's trading history or asset base might not yet be sufficient to secure the loan on its own. As long as the company manages its repayments, the director won't need to pay up.
The more risk a lender senses in the company, the more personal liability they are likely to require from the directors. This makes careful negotiation and scrutiny of the terms paramount.
Your aim should be to secure a limited personal guarantee, ideally one with a clearly defined fixed sum, a reasonable trigger event, a sufficient notice period, and a clear right to terminate the guarantee (for instance, upon full repayment of the debt or after a fixed period following resignation as a director).
The Five Risks of a Director's Personal Guarantee
Before committing to a personal guarantee, it's mandatory to get Independent Legal Advice from a specialist solicitor.
- 1
How much are you guaranteeing?
- Fixed Sum: This is the least risky, where you are only liable for a specific, pre-agreed amount of the loan.
- Current Loan Plus Costs: Your liability extends to the existing loan amount at the time of demand, plus any associated legal fees, charges, and expenses incurred by the lender.
- Current Loan, Further Borrowing & Costs: This is a broader guarantee, covering not only the initial loan but also any additional funds the company may borrow from the same lender in the future, plus all associated costs.
- All Possible Losses: This represents the highest level of risk. Under this clause, the director is exposed to all potential losses, direct and indirect, that the lender might incur as a result of their financial relationship with the company. This could far exceed the original loan amount.
- 2
Missed payments
While you might expect some leniency, unlike typical residential mortgages, lenders for company loans often have much less understanding when payments are missed. The terms of your personal guarantee dictate precisely when and how swiftly the lender can take action against you if the company defaults.
The severity of this risk depends on the clause:
- For the Missed Payment Only: In the best-case scenario, the lender may only require the director guarantor to cover the specific missed mortgage payment. This is less common but offers some protection.
- For the Whole Debt Immediately: More commonly, a single missed payment by the company can trigger the demand for the entire outstanding debt from the director guarantor. As previously discussed, this "whole debt" could be the original mortgage amount, or it could extend to "all possible losses," depending on the guarantee's terms.
Download your Director's Guarantee Mortgage Terms
- 3
Trigger events
- Notified Missed Payment: The company misses a payment, but the lender must formally notify them, and a period (a few days or weeks) is given for the company to rectify the default before the guarantee is invoked. (Best Risk)
- Single Missed Payment: A more immediate trigger where the lender can pursue the director after just one missed payment by the company, without necessarily providing prior notification to the company.
- Any Breach of Terms: This is a broad trigger. If the company breaches any term of the mortgage agreement (e.g., failure to provide financial statements, a change in business structure), the lender can demand personal repayment, regardless of whether a payment was missed.
- "On Demand" Clause: The most hazardous trigger. The mortgage lender can call in the guaranteed mortgage obligation "on demand" whenever it chooses, even if the company has met its payments and has not breached any terms. This gives the lender absolute discretion. (Worst Risk)
What is the legal definition of 'On Demand'?
"must be repaid on the demand of the lender". This means the lender can demand repayment without any specific reason or trigger.
- 4
Duration of the guarantee
- Debt Repayment: The ideal scenario, where the guarantee automatically terminates once the full debt is repaid by the company.
- Director Cancellation: Less common, but some agreements might allow the director to actively cancel the guarantee under specific conditions (e.g., after a certain period or if an alternative security is provided).
- Lender Cancellation: The lender retains the right to cancel the guarantee, often at their discretion or if the company's financial standing significantly improves.
- No Right of Termination: This is the most risky situation and essentially lasts indefinitely. It may not automatically terminate even after the debt is fully repaid, or crucially, if you sell your shares, resign as a director, or leave the company. This exposes you to long-term, undefined liability.
- 5
Notice and Grace Periods
One of the most immediate and potentially devastating risks is the speed at which a lender can enforce a personal guarantee. Many standard director guarantee agreements are drafted to give the lender maximum leverage, often with little to no prior warning to the director:
- No Formal Notice Required: Lenders are frequently not legally obligated to issue a formal written notice to the director before demanding repayment. This means you might only become aware of the issue when a demand is made.
- No Grace Period: Similarly, many agreements do not provide any "grace period", a short window of time for the director to arrange payment once a demand is made. Payment can be required immediately.
If the company fails to make a payment when due (e.g., by midnight on a specific date), the lender could, in theory, demand full personal payment from you as early as the very next day.
Failure to meet an immediate demand can escalate rapidly: within approximately 21 days of both the company and the director failing to make payment, the mortgage lender may be legally entitled to petition for the director's bankruptcy.
Personal Guarantees with multiple directors
In many companies, particularly those with more than one director, lenders may require personal guarantees from multiple directors. This allows the responsibility for the company's debt to be shared amongst several individuals, potentially making the overall risk more manageable for each director, but it does mean that each named director will still be personally liable for the guaranteed amount.
When multiple directors are involved, each director will require their own Independent Legal Advice (ILA) to ensure they fully understand their obligations, the extent of their liability, and any potential joint and several liability clauses within the guarantee agreement.
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Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
