Personal guarantees on a business mortgage, explained

A personal guarantee is a written promise by an individual, usually a director or shareholder, to repay the company's borrowing if the company itself cannot. The company remains the main borrower on the business mortgage. The guarantee sits behind it as a backstop, so the lender can pursue the guarantor personally if the business defaults and the sale of the premises does not clear the debt.

It is a separate legal document from the loan agreement, and it survives on its own terms. That is why the wording matters so much. A guarantee can be tightly drawn or very broad, and two guarantees that look similar at a glance can expose you to quite different amounts. Reading the actual document, rather than relying on a summary, is the only way to know what you are agreeing to.

Most established businesses trade through a limited company, and that structure exists precisely to separate the owners from the company's debts. A lender looking at a company borrower knows it can only chase the company and its assets if things go wrong. A personal guarantee restores some of the alignment the lender is looking for. It gives the directors a direct personal stake in keeping repayments on track.

Lenders tend to ask for a guarantee because it does two things at once:

• It aligns incentives. An owner who has signed personally tends to manage the loan and the business more carefully.
• It adds recourse. If the premises sell for less than the outstanding balance, the guarantee gives the lender a route to recover the shortfall.

The ask is more common where the company is younger, where profits are thinner relative to the loan, or where the loan-to-value sits at the higher end of the range. On a strong, long-established trading business with a healthy deposit, the guarantee is often narrower or, occasionally, not required at all.

Limited liability protects your personal assets from the company's debts as a default position. A personal guarantee is you voluntarily setting aside that protection for one specific debt. It does not remove limited liability across the board, and it does not make you liable for every obligation the company has. It makes you liable for the guaranteed borrowing, on the terms written into the guarantee, if the company fails to pay.

This is the point owners most often misread. Signing a guarantee on your business mortgage does not turn your whole company back into something like a sole trader arrangement. It carves out a single loan and puts your name behind it. Everything else about the limited-company structure stays as it was.

Where a company has more than one director or shareholder, lenders frequently ask each of them to guarantee the loan. These are usually written as joint and several guarantees, and that phrase carries real weight. Joint and several means the lender can pursue any one guarantor for the full amount, not just for that person's share.

In practice, if there are three equal directors and one has the assets to settle the shortfall, the lender can pursue that one person for the whole balance. It is then up to the guarantors between themselves to sort out who contributes what. That internal split is a private matter and is not the lender's concern.

A few things are worth agreeing among the directors before anyone signs:

• A written understanding of how any call under the guarantee would be shared out between you.
• What happens if a director leaves the business, since a guarantee does not automatically fall away when someone resigns.
• Whether all directors genuinely need to sign, or whether the lender would accept guarantees from the main shareholders only.

An unlimited personal guarantee exposes the guarantor to the full outstanding debt plus interest and the lender's costs, with no ceiling. That is the broadest form and the one to look at hardest. In many cases we can discuss a capped or limited guarantee, where liability is fixed at a set figure or a set percentage of the loan rather than the whole balance.

A capped guarantee gives you certainty. You know the most you could be asked for, whatever happens to the property value or the wider debt. Where the premises provide solid security and the loan-to-value is comfortable, a cap that covers the likely shortfall gap, rather than the entire loan, can be a reasonable position to put to lenders.

Personal guarantee insurance is worth knowing about as a concept. It is cover that pays out a proportion of a guarantee if it is called, and some directors take it out to soften the personal exposure. Whether it is suitable, and what it costs, is a question for a suitably qualified adviser rather than something we arrange, but it is sensible to be aware the option exists.

The guarantee a lender wants is a reflection of how much risk it sees in the deal. Reduce the risk and the ask usually softens. The levers that tend to move it are the same ones that improve the mortgage terms generally.

• A larger deposit. Bringing the loan-to-value down, say from the top of the range towards 70 percent, gives the lender more cushion in the property and less reason to lean on a personal guarantee.
• Stronger accounts. Clean, profitable figures that comfortably cover the repayments make the company itself a better covenant, which is exactly what lessens the need for personal backing. Our guide on how lenders read your accounts covers what they look for.
• A capped rather than unlimited guarantee. Even where a guarantee is unavoidable, negotiating a ceiling is often possible.
• Choosing the right lender. Appetite for guarantees varies across the market, and part of our job is placing your case with lenders whose stance suits your situation.

As indicative figures, owner-occupier business mortgages are available from around 6 percent, typically at 70 to 80 percent loan-to-value for strong trading businesses, with deposits from around 20 to 30 percent. All of that is subject to status and valuation, and the personal guarantee position moves with it.