What you need to know about personal guarantees

If you’ve been considering small business finance, you’ll likely have come across the term, ‘personal guarantee’ a few times already. Here, we break down what it means and how it works in practice to help you get a better understanding of what’s required of you when you sign a personal guarantee.

What is a personal guarantee?

In simple terms, a personal guarantee is an agreement between a business owner/director and a loan provider, such as Funding Circle, that if your business is unable to make the repayments on your loan, you, the individual, agree to be responsible for paying back the loan yourself. 

While that may initially sound a bit daunting, personal guarantees raise your chance of being accepted for finance by reducing the risk to the provider. This means the provider can lend to more businesses than they might otherwise.

Does Funding Circle take personal guarantees?

At Funding Circle, we have a range of products available, including FlexiPay line of credit, Funding Circle business loans, loans under the Government’s Recovery Loan Scheme (RLS). Personal guarantees are required on all Funding Circle business loans, and lines of credit over certain amounts.

We also connect businesses with trusted partners when we are unable to help. Their personal guarantee requirements will vary depending on the product and provider.

Who does the personal guarantee benefit?

At Funding Circle, loans are funded by a community of investors who lend through our platform. Asking for a personal guarantee means that should a business be unable to repay their loan, we have a means to recover as much of the investor’s funds as possible. As a result, investors are more willing to support businesses through our platform. 

Likewise for our other products, a personal guarantee allows us to approve more businesses for finance.

If I miss a loan repayment, will my personal guarantee be enforced?

Missing a single payment doesn’t automatically mean a claim against a personal guarantee. However, missing payments can affect the credit score of a business or incur extra costs, so if you think you’ll miss a payment, or have missed a payment, get in touch with our in-house customer support team straightaway. 

Please note that, although defaulting a loan is a last resort, we may default a loan at any time if the loan contract has been breached and we believe it is in the best interest of investors.

When does a personal guarantee get enforced?

Your personal guarantee will be enforced if we have to default your loan. A default occurs when your business misses four full monthly payments (ie. the business is 90 days late from the date of the first missed payment), or if other terms of the loan contract have been breached, which may mean that the loan will be defaulted earlier. 

Once your business has received the default notice, all personal guarantors will individually receive a letter of demand and will therefore become personally liable for the total debt (inclusive of all interest and costs). We then work with you and any guarantors to recover the full balance of the loan, which comprises unpaid principal, interest, charges and costs.

What are joint and several personal guarantees?

A joint and several personal guarantee means that all personal guarantors are both jointly liable, as well as individually liable, for the total amount of the debt. For example, if there were three guarantors, each of those guarantors would be fully liable for the total debt due on that loan. If two out of three of the guarantors didn’t pay, the remaining guarantor would have to repay the total outstanding balance of the debt instead.

Is my personal property at risk with a personal guarantee?

If you took out a loan under the Government’s Recovery Loan Scheme (RLS), personal guarantees cannot be enforced over Principal Private Residences (ie. your home).

For other Funding Circle products, the debt can be enforced against your personal property, as we could seek a fixed charge over your property to secure the total debt owed and, if applicable, to support any payment plan. If a fixed charge isn’t provided voluntarily, then it could be obtained via the Court. We’ll always work with you to try and find a suitable payment method to help you get back on track, and we’ll only ever pursue enforcement of a personal guarantee (and therefore, potential enforcement against your personal property), once the loan has been defaulted.

While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.

If you apply for a loan through Funding Circle, we will assess which loan product is right for you. If we can offer you a loan on similar or better terms without RLS, we will do so.