The Importance of Understanding Personal Guarantees

The COVID-19 pandemic drove many SMEs to seek emergency funding, causing a dramatic rise in business lending. According to the British Business Bank, gross small business lending rose to £104bn during 2020.

Reparo Finance recently commissioned independent research on SMEs’ attitudes to and understanding of business borrowing. The results were astounding.

In particular, Reparo found that almost half of all businesses that have taken out a loan did not fully understand the level of personal risk they were accepting.

Nearly half of SMEs that recently took out business finance do not know what a Personal Guarantee (PG) is or understand the level of risk they have accepted. This is despite the fact that they would have signed one in their loan agreement. Agreed during the completion of business borrowing, a Personal Guarantee is an individual’s legal promise to repay the credit their company has taken on.


Why SMEs need to consider Personal Guarantee

PGs will always have a place in certain finance transactions and allow the lender to get comfortable with the proposed deal and provide funding.

The difficulty is that an increasing number of lenders have come to use a PG as a default rather than looking at the deal and the security that is provided within the business. There is also a question over who should outline the implications of a PG in a gone scenario. The lender will advise the client to seek third party legal advice before signing.

At that time, the need for the money often outweighs the desire to pay for a solicitor and have the documentation reviewed—this is especially the case with smaller SMEs. As a commercial finance brokerage, we aim to provide awareness to our clients. There have been too many occasions to count when a client has adamantly believed that they have not provided a PG, only to find upon review of original agreement documentation that one has been provided. In some cases, this could even be an unlimited PG as opposed to a limited PG.

There needs to be more awareness of PGs and what they mean to the client, especially if lenders start using them as a default point. It also needs to be explained that the balance owed may not just be limited to the outstanding loan amount and may include additional penalties and charges. It is vital that the client is fully aware of what they agree to and that an assets statement has been taken to support the guarantee.


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