What is a Personal Guarantee and Why Do Lenders Require a PG?

Have you ever been asked to give a personal guarantee while applying for a business loan? A personal guarantee (PG), also called a director’s guarantee, is a common requirement in lending circles. For most of the  business loans, lenders would ask a PG from the director/major stakeholder to reduce their risks. But what does a PG mean and why do lenders want it? You must know what you are signing up for when you agree to a PG. Let’s break down this concept and decode what it means for you!

Personal Guarantee for a Business Loan: Here’s What it Means

When you sign on the dotted line and accept a PG, it means that you will be liable for your business debt if your business fails to service or repay the debt. As the director or owner of the firm, you will bear personal liability for your small business loans. In case your firm defaults on loan repayments, a PG allows lenders to cover their losses by liquidating your private assets. For example, they may pursue your porperty to recoup the amount they lost.

Many entrepreneurs set up their small businesses with corporate-like structures to minimise all personal liabilities. However, accepting a PG can undo this benefit and compel the owners to be liable for the debt.  There are different types of PGs. An “all-monies” guarantee means that the director must cover all financial liabilities, even if they emerge due to a future transaction. Directors may continue to be liable for ongoing PGs even after leaving the business.

How Does a PG Work For Companies with Multiple Directors?

It is critical to read the fine print before accepting a PG. Lenders often ask for a “joint and several” director’s guarantees while approving a loan. This option means that the lender may use their discretion to pursue one, some, or all the directors in the event of default. For example, if your company is led by three directors and you have the maximum amount of personal assets, the lender may come after you alone. The lenders want to secure their cash and recoup their losses with the least effort. That is why they use their discretion to manage their risks.

Why Do Lenders Ask for PGs?

Lending money to small businesses is associated with a substantial level of risk. Hence, lenders want to minimise their risks and cut their losses. They ask for a PG for the following reasons.

• The PG provides the lenders with a secure option to recoup the money if their borrower defaults on repayments.
• The PG ensures that directors will strive towards financial discipline and work to prevent defaulting at all costs.
• The PG reduces the lender’s workload in assessing the borrower’s creditworthiness and enables them to take a safer bet.

How Should You Approach PGs While Taking Loans?

As long as you understand what you sign up for, it is acceptable to provide a personal guarantee. You must ensure that your business can repay the money on time to protect your personal assets.

Contact the Broc Finance experts today to understand these aspects in more detail!