The Day Your Business Debt Becomes Personal
The Day Your Business Debt Becomes Personal
Many directors believe that business debt stays with the business and that if a company fails, their personal liability is limited to what they have invested. That belief often holds true — until a personal guarantee comes knocking at the front door of your own home.
One of the key reasons entrepreneurs choose to trade through a limited company is protection from being pursued personally. Limited liability is designed to safeguard personal assets such as homes, savings and investments from business debts and legal claims, with liability stopping at the company’s finances. However, when a director signs a personal guarantee, that separation is overridden. A personal guarantee removes the protection of limited liability and exposes the director’s personal assets to enforcement action if the company fails to repay its debts.
Personal guarantees are deeply entrenched in the UK’s commercial lending landscape. From a lender’s perspective, they are a risk-reduction tool, particularly where businesses are new, high-risk or asset-poor. In practice, many lenders will simply refuse to advance funds unless a personal guarantee is in place.
The real impact of a personal guarantee is often only felt when the company defaults. At that point, what was once a paper agreement becomes a personal liability with very real consequences. This frequently causes significant stress and anxiety for directors (and their families) who may already be under intense financial and emotional pressure.
Many directors may misunderstand how personal guarantees operate in practice. Some assume the guarantee falls away if the business fails or that enforcement only follows wrongdoing. Others believe it applies only for a limited time or for a limited amount, without appreciating that additional costs such as interest, legal fees and administrative charges may also be recoverable.
In most cases, personal guarantees do not terminate automatically. They often remain in force until the underlying debt is fully repaid or the guarantee is formally terminated in accordance with its terms. It is therefore essential that, once a loan has been repaid, a director obtains a signed and dated deed of release from the lender as written confirmation that the personal guarantee has also been discharged. This is also the case if you are planning on selling your business or your shares in the company. Any personal guarantee that you have provided during your time with the company must be released before any sale completes. It will not fall away automatically on the sale.
In the UK, lenders will commonly require directors to obtain independent legal advice before entering into a personal guarantee. This protects both parties; lenders want assurance that the director has understood the legal implications and was not acting under duress to sign it, while directors benefit from understanding exactly what risks they are accepting.
A personal guarantee is not simply a routine formality; it is a deliberate transfer of commercial risk from the company to the director personally. Understanding its implications before signing is essential.
If you are being asked to provide a personal guarantee, please contact Monisha Khan — we can guide you through the risks and help protect your position as far as possible.
