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What are personal guarantees on company borrowing?

Business Debt

Sharon McDougall - Updated - 19th March 2025 - 3 minutes to read

It may be the case that in order for a limited company to take out a form of finance - such as a loan - its directors need to sign a personal guarantee to secure this borrowing.

If you personally guarantee a loan taken out by your limited company it means that you are committing to repaying any outstanding balance in full in the event of your company being unable to do so due to insolvency.

In practice this might require the sale of one or more of your assets, or in some instances repayment could involve using your cash or savings.

Many lenders are reluctant to grant borrowing to companies - particularly start ups or those with a poor credit record - without this form of security, or guarantee, that the loan will be paid if the limited company becomes unable to manage the repayments at any stage.

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Why do lenders require a personal guarantee for business borrowing?

Lenders request personal guarantees to reduce their own risk from lending to a limited company.

If a limited company defaults on a loan, it’s much easier for the lender to recoup their money if the director has pledged to settle the debt on the company's behalf.

Signing a personal guarantee to underpin company borrowing is not always something which causes problems. Should the company be able to keep up with the repayments on the loan, there will be no requirement for the guarantor to step in and repay. The problem occurs when you’ve provided a personal guarantee and your company begins experiencing financial difficulties.

What can I do if I have concerns about a personal guarantee?

If you’re worried about a personally guaranteed business loan, you need to find out the extent to which you’re liable. You may be able to do so simply by checking the paperwork, but a clearer picture will be obtained by speaking to the lender.

They’ll be able to clarify your position and let you know whether they’d be open to negotiation for paying in instalments rather than a lump sum should the worst happen. Should the lender be open to a repayment plan, this would often negate the need to sell your asset if one has been used to guarantee the original borrowing, and reduce the considerable financial pressure that occurs when a personal guarantee is called upon.

What if you can’t afford to pay the outstanding debt associated with the personal guarantee?

If your company becomes insolvent and enters into a formal liquidation process, the personal guarantee will crystalise and the responsibility for repaying the outstanding amount will fall to the individual who provided the personal guarantee.

If you can’t afford to pay the sum required under the personal guarantee, you may need to consider one of the debt relief procedures that are available in Scotland in order to help you deal with the debt.

These include the Debt Arrangement Scheme, Trust Deed, and Sequestration. Each procedure has its own eligibility criteria and your own personal circumstances - whether you have a regular income, for example - influence their suitability. If you find that satisfying the terms of your personal guarantee is impossible, it’s crucial to seek professional debt help straight away.

Scotland Debt Solutions specialise in helping Scottish residents deal with debt, and we can offer a free consultation to assess your situation. We’ll identify your options and provide reliable unbiased advice on how to proceed. We work from a number of offices around Scotland - please call one of our expert team to find out more.

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Administration is an insolvency process that provides breathing space for companies struggling with debt, giving them the time needed to establish a plan going forwards. With several options potentially available at the end of administration, it’s an effective step for many businesses.

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Company Voluntary Arrangement

A Company Voluntary Arrangement (CVA) can help a company to escape debt by negotiating a formal payment plan with creditors allowing for reduced monthly repayments. Directors retain full control of their company during a CVA and the business is allowed to continue trading throughout.

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Compulsory Liquidation

Compulsory Liquidation is a formal insolvency procedure used to close down limited companies that cannot pay their debts.

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Creditors Voluntary Liquidation

When a limited company becomes insolvent, it’s important for directors to place the interests of creditors first and do all they can to minimise further losses. Creditors’ Voluntary Liquidation (CVL) is an insolvency process that allows this to happen, and ensures directors comply with strict insolvency laws.

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Debt Arrangement Scheme (DAS)

A Debt Arrangement Scheme (DAS) lets you pay off your debt through a series of manageable instalments over a reasonable length of time.

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Members’ Voluntary Liquidation

Members’ Voluntary Liquidation (MVL) allows you to close your business and extract the profits in a tax-efficient way. It’s a process that’s available to solvent limited companies, and requires you to make an official Declaration of Solvency prior to commencement.

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Sequestration is the Scottish version of bankruptcy and may be suitable for you if you do not have the money to pay back your debts

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A Trust Deed involves making a monthly contribution to your debts for up to four years. After this time any remaining debt included in the Trust Deed will not need to be paid.

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Sharon McDougall

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Sequestration

Sequestration is the Scottish version of bankruptcy and may be suitable for you if you do not have the money to pay back your debts

Find out More

Trust Deeds in Scotland

A Trust Deed involves making a monthly contribution to your debts for up to four years. After this time any remaining debt included in the Trust Deed will not need to be paid.

Find out More

Debt Arrangement Scheme (DAS)

A Debt Arrangement Scheme (DAS) lets you pay off your debt through a series of manageable instalments over a reasonable length of time.

Find out More

Business Debts in Scotland

Whether you are a sole trader or a limited company director, we can help you work through your current financial problems including money owed to HMRC

Business Debts in Scotland

Our Insolvency Practitioners are regulated by ICAS or the IPA and our firm is authorised and regulated by the Financial Conduct Authority

We have FCA authorisation for advice relating to Debt Arrangement Schemes and we are regulated by the ICAS and IPA when giving advice as an insolvency practitioner leading to our appointment in formal insolvency proceedings

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