Quick answer
Lenders typically ask for personal guarantees on unsecured business loans because a limited company can fail and leave the lender with no recourse to its directors. A PG turns the director into a backstop: if the company defaults and cannot repay, the lender can pursue the guarantor personally. Most UK unsecured SME lending of any meaningful size involves a PG on at least one director.
What a personal guarantee actually does
A personal guarantee is a contractual promise by a director (or another individual) to repay the lender if the borrowing company cannot. It does not turn the loan into personal debt while the company is paying - the company is the primary borrower. The guarantee only bites if the company defaults and the lender has exhausted reasonable recovery against company assets.
Most PGs in UK SME lending are either limited (capped at a percentage of the loan, often 20-30% but sometimes up to 100%) or unlimited. They almost always allow the lender to pursue the guarantor personally for the relevant amount, which can include the guarantor's own home equity, savings and other assets, subject to general insolvency law.
Why lenders insist on them
A limited company is, by design, an entity with limited liability. If it goes into administration, unsecured creditors typically receive a small fraction of what they are owed, if anything. Lenders pricing unsecured SME loans cannot run a sensible book if their downside is that level of loss in every default.
The PG aligns the director's incentives. A director who has signed a guarantee will, all else equal, push harder to keep the company solvent and to communicate early if problems arise. Lenders treat this alignment as a meaningful credit-quality signal in their underwriting.
When you may avoid or limit a PG
Some products do not need a PG. Government-backed schemes have, at various points in recent years, restricted PGs on lower loan amounts. Asset finance secured against the asset itself sometimes does not require one. Invoice finance is asset-backed and may not require a full PG, though many providers still ask for a fraud or warranty PG.
Where a PG is required, you can often negotiate. Capping the guarantee at a percentage of the loan, splitting it across multiple directors, or buying PG insurance can all reduce personal exposure. Lenders will not always agree, but a clean ask early in the conversation costs nothing.
What to check before signing
Read the PG document, not just the loan agreement. Look for the cap, the trigger events, whether the guarantee continues after the loan is repaid (so-called continuing guarantees), and whether it covers future advances or only the named facility.
Take independent legal advice before signing, particularly for larger commitments. Some lenders require evidence that the guarantor has received legal advice. PG insurance is offered by specialist brokers and can cover a portion of the exposure for an annual premium.
Key points
- A PG turns the director into a backstop if the company defaults.
- Most unsecured UK SME lending of meaningful size involves a PG.
- PGs can be limited (capped) or unlimited; both are negotiable.
- Some products (asset, invoice, certain government-backed) reduce PG exposure.
- Take independent legal advice before signing.
Finance types that may be relevant
The product categories below are commonly considered for this situation. Suitability is subject to lender underwriting and your trading profile.
Unsecured Business Loan
Term loan or credit line repaid through fixed instalments.
Asset Finance
Finance to buy/refinance equipment, vehicles or machinery.
Invoice Finance
Funding advanced against unpaid B2B invoices.
Related guides
Frequently asked questions
- Can I refuse to sign a PG and still get the loan?
- On most unsecured SME loans, no. Some asset-backed and invoice-finance products are an exception, but for vanilla unsecured term lending the PG is usually a hard requirement.
- Does a PG put my house at risk?
- It can. If the company defaults and the lender enforces the PG, your personal assets - including any equity in your home - can be in scope, subject to insolvency law.
- Can I get PG insurance?
- Yes. Specialist brokers offer PG cover that pays out a percentage of the guarantee in the event of enforcement. Premiums depend on size and risk.
- Does a PG cover interest and fees as well as principal?
- Usually yes. Most PG wording covers all sums due under the facility, including interest, default charges and recovery costs. Check the precise wording.
Compliance note
Eligibility guidance only - not financial advice, not a loan offer, not a guarantee of approval.