Why Do Business Loans Require Personal Guarantees?

Business loans often require personal guarantees because they give lenders additional protection if a company cannot repay what it owes, similar to guarantor loans.

A personal guarantee means a director or business owner can become personally responsible for some or all of the outstanding debt if the business defaults. This can make lenders more willing to provide finance, particularly when a company has limited assets or a short trading history.

 

Key points

• A personal guarantee reduces the lender’s risk when providing business finance.
• It can make finance available to businesses that do not have enough assets to offer as security.
• Directors should understand the potential personal financial consequences before signing one.

 

What is a personal guarantee?

A personal guarantee is a legally binding agreement between a lender and an individual. The person agrees to repay the business’s borrowing if the company fails to do so.

The guarantee is separate from the business’s liability for the debt. A limited company normally provides protection between the company’s finances and the owner’s personal finances. A personal guarantee can reduce that protection in relation to the specific borrowing covered by the agreement.

The British Business Bank says a personal guarantee can help a business obtain finance that it might otherwise struggle to access. However, it also warns that the person providing the guarantee could become personally liable if the business cannot repay the loan.

Why do lenders ask for personal guarantees?

Lenders take a risk whenever they provide finance. They need to be confident that the business can make its repayments, but forecasting the future performance of a small business is not always straightforward.

A company may also have few assets that can be used as security. A new business, for example, may not own property or valuable equipment. A personal guarantee can provide the lender with another form of protection.

The British Business Bank explains that lenders can consider the availability of security when assessing applications. A lack of assets or a willingness to provide a personal guarantee can affect whether a business is able to obtain finance.

How common is business borrowing?

External finance is an important part of the UK small business market. The British Business Bank’s 2026 Small Business Finance Markets report found that around half of smaller businesses sought external finance during 2025.

The same report highlights the growing range of finance available to smaller businesses, including lending from challenger banks, specialist lenders and non-bank finance providers.

This means businesses have more options than simply approaching a high street bank. However, lenders still need to assess the risk of each application, and personal guarantees remain part of some lending arrangements.

Are personal guarantees required for every business loan?

No. A personal guarantee is not automatically required for every type of business finance.

Some lenders may offer finance based on the strength of the business and its assets without requiring a personal guarantee. Secured lending may instead be supported by property, equipment or other business assets.

For unsecured business loans, however, personal guarantees are relatively common, but it is possible to get a business loan without a personal guarantee. The British Business Bank says unsecured business loans often require a personal guarantee because the lender does not have business assets securing the borrowing.

Government-backed schemes can have their own rules. Under the current Growth Guarantee Scheme, lenders are allowed to request personal guarantees where this is part of their normal lending practice. The scheme also prevents a borrower’s principal private residence from being taken as security.

What happens if the business cannot repay?

If a company defaults, the lender can take steps to recover the money owed directly against the individual who provided it.

The exact amount that could be recovered depends on the wording of the guarantee. Some guarantees cover the full borrowing, while others may be limited to a specific amount.

This makes it important to understand exactly what is being guaranteed before signing the agreement.

What should you check before signing?

Business owners should look carefully at the guarantee alongside the loan agreement. Check whether it is limited or unlimited, whether it covers the whole facility and whether there are circumstances where the lender can demand payment.

It is also worth considering what would happen to your personal finances if the business failed. A guarantee can provide access to useful finance, but it also transfers some of the lending risk from the company to the individual.

Independent legal or financial advice can be appropriate before entering into a significant personal guarantee.

Why lenders continue to use them

For lenders, personal guarantees provide another layer of protection against losses. For businesses, they can help unlock finance that might otherwise be unavailable.

They are particularly relevant to smaller and newer companies that have limited assets or a shorter financial track record.

A personal guarantee should therefore not automatically be viewed as a reason to reject business finance. Instead, business owners should understand the risks, compare the available finance options and make sure the proposed borrowing is affordable before committing to the guarantee.