Director's personal guarantee: what you're signing and how to limit it

What a director’s personal guarantee is

A limited company is a separate legal person, so normally its debts are its own. A personal guarantee changes that for one lender: you promise that if the company doesn’t pay, you will. If the business fails, the lender can claim the guaranteed debt from you personally, along with interest and its costs.

Lenders ask for them because small companies often have few assets of their own. They’re common on:

• business loans and overdrafts
• commercial mortgages, bridging and development finance
• asset finance and hire purchase
• commercial leases and trade credit with suppliers

The clauses that matter most

How much you’re guaranteeing

An unlimited guarantee covers everything the company owes the lender, plus interest and enforcement costs. A capped guarantee has a maximum figure. Check whether interest and costs sit inside the cap or on top of it.

Which debts it covers

An “all monies” guarantee covers every debt the company owes that lender, now or in future, not just the loan in front of you. A guarantee limited to a specific facility is much narrower.

Joint and several liability

If several directors guarantee the same loan, the guarantee is usually joint and several. The lender can claim the whole amount from any one of you. You may be able to recover a share from your co-directors afterwards, but that’s your problem, not the lender’s.

Paying on demand

Most guarantees are payable on demand and treat you as a “principal debtor”. In practice, that means the lender doesn’t have to sue the company or sell its assets first. It can write to you as soon as the company defaults.

Changes without asking you

Most guarantees let the lender extend the term, increase the facility or change the interest rate without your consent, and you stay liable. Without that wording, a change that increases your risk could release you, which is why lenders include it.

Security behind the guarantee

Some lenders also ask for a legal charge over your home to back up the guarantee. Then the lender can enforce against the property directly. If your home is jointly owned, the other owner will usually need their own independent advice too.

What happens if the company can’t pay

The lender sends a written demand. If you don’t pay, it can get a court judgment against you and then enforce it, for example with a charging order over property you own or, for larger debts, bankruptcy proceedings. A company going into administration or liquidation is usually the trigger: the lender claims what it can from the insolvency and then turns to the guarantors for the rest.

Resigning as a director doesn’t end the guarantee. See how to get out of a personal guarantee.

What to ask for before you sign

Lenders don’t always agree, but these are normal requests, and it costs nothing to ask:

• A cap, ideally including interest and costs
• A specific loan only, rather than “all monies”
• A time limit or step-down: the guarantee ends, or reduces, after a period of good repayment
• Several liability: each director is liable only for an agreed share
• No charge over your home, or a cap on what the lender can recover from it

Some insurers offer personal guarantee insurance, which can cover part of what you’d owe if the guarantee is called in. It has exclusions and waiting periods, so read the policy terms. Loans under government-backed schemes, such as the Growth Guarantee Scheme, have their own rules on guarantees; ask your lender which apply.

Why the lender wants independent legal advice

Following Royal Bank of Scotland v Etridge, lenders want proof that each guarantor understood the guarantee and wasn’t pressured into signing. So most lenders require advice from a solicitor who isn’t acting for the lender, and a signed ILA certificate, before they release the funds. Each director is advised on their own position and gets their own certificate.

The advice is a chance to understand exactly what you could lose, and to raise anything worth negotiating before it’s too late. See ILA for a director’s personal guarantee.