Personal guarantees explained

What it is

A personal guarantee is a promise by an individual that if the company does not pay, they will. It sits outside the company entirely. That is the whole point of it, and it is the reason it is asked for.

Buying through a limited company or a NewCo puts a legal wall between you and the business's obligations, which is exactly why it is the normal structure for these deals. A guarantee is the lender's way of reaching over that wall for a specific debt. It does not remove the company. It just means the company is no longer the only place the lender can look.

Why almost every SME acquisition involves one

In the sectors on this site there is usually very little tangible security. You are buying a fee block, a maintenance book, a monitoring base or a service round. There is no property, the vehicles are worth a fraction of the debt, and a debenture over the company's assets is worth whatever those assets fetch if the business has already failed, which is usually not much.

So the lender is being asked to advance a substantial sum against income it hopes will continue. A guarantee is how it converts some of that risk into something it can act on. It also does something less mechanical: it keeps the buyer's own money in the room. A borrower with nothing at stake beyond the company is a different borrower.

Expect one. A proposal that assumes there will not be a guarantee is usually a proposal that has not been tested against a real lender.

What it commits you to

Read the document, because guarantees vary far more than buyers expect. The things that decide what you have actually signed:

The amount. Capped at a stated figure, or unlimited. A capped guarantee is not a smaller version of the same thing: it is a different exposure.
What it covers. That one facility, or everything the company owes that lender, now and in future. An "all monies" guarantee quietly attaches to borrowing you have not taken yet.
Interest and costs. Whether the cap includes them or sits on top. A cap that excludes enforcement costs is a larger number than it looks.
Joint and several. Where several people guarantee, this means the lender can pursue any one of them for the whole amount, not a share. If your co-guarantor cannot pay, that is your problem, not the lender's.
When it can be called. Usually on default, which includes breaching a covenant, not only missing a payment.
Whether it is supported by a charge. A guarantee backed by a legal charge over your home is a materially different commitment from one that is not.
How it ends. Repaying the facility does not automatically release you if the wording is broad. Ask what discharge looks like and get it in writing when it happens.

What a cap does, and what it does not

A cap limits the principal you can be pursued for. It is the single most useful thing to negotiate and it is frequently available, particularly where the lender is comfortable with the business and wants the deal.

What a cap does not do is limit the disruption. A capped guarantee still means a claim against you personally, still has to be disclosed on future borrowing, and still affects what else you can do. It reduces the size of the problem rather than its nature.

How a cap behavesOn a facility of 400,000 with a guarantee capped at 100,000, the exposure is not simply a quarter of the debt. If the wording lets interest and enforcement costs sit outside the cap, the figure pursued can exceed the cap itself. Whether costs sit inside or outside is a drafting point worth more than most of the commercial negotiation around it.

Personal guarantee insurance

Policies exist that cover a proportion of a called guarantee. They are worth understanding rather than dismissing, and worth understanding properly rather than treating as a solution.

They typically cover a share rather than all of it, that share often steps up over the first years of the policy, the premium recurs for as long as the guarantee exists, and cover is subject to the policy's own conditions. It reduces exposure. It does not make a guarantee something you can sign without thinking about.

Whether it is worth it depends on the size of the guarantee against the premium over the life of the facility, which is arithmetic worth doing rather than a matter of principle. This is a question for the broker and the insurer, not for us: we do not advise and we do not recommend products.

What to do before you sign

Ask for a cap, and ask early, while the lender still wants the deal. It is much harder to introduce at the last minute.
Ask what is excluded from the cap. Interest, costs and enforcement expenses are the usual answer.
Ask what releases it. A specific event, in writing.
Check whether it is all monies or facility-specific.
Understand joint and several exposure if you are not guaranteeing alone, and think about what happens if a co-guarantor's circumstances change.
Take your own legal advice. Not the lender's, not the seller's, and not this page. A guarantee is a personal commitment that can outlive the business, and it is the one document in an acquisition most worth paying a solicitor to read properly.

What happens if it is called

A guarantee is not usually the lender's first move. It comes after the facility has defaulted, after the company has been pursued, and often after the lender has taken whatever the debenture is worth. By the time a demand lands, the business position is normally already resolved one way or the other.

What follows is a demand for payment within a stated period, then, if it is not met, the ordinary process any creditor has available. Where the guarantee is supported by a charge over property, that charge is the route. Where it is not, the lender is an unsecured creditor of yours, which is a weaker position but not a harmless one.

The practical lesson is that the time to think about a guarantee is when the deal is being structured, not when the demand arrives. By then the document is what it says.

Where a household member is involved

Where a guarantee is supported by a charge over a jointly owned home, the other owner will normally be required to take independent legal advice before signing. This is not a formality invented to slow things down. It exists to protect that person, and lenders take it seriously because a guarantee given without it can be difficult to enforce.

Build the time for it into the timetable. It is a routine cause of completion slipping by a week for no better reason than nobody scheduled it. See timelines.

The part that varies most between lenders

Here is what buyers are rarely told: for the same business, the same buyer and the same amount, what different lenders expect by way of guarantee varies enormously.

A funder that understands the sector and is comfortable with contracted recurring income may take a capped guarantee, or in some cases none at all where the income is strong and the contribution is meaningful. A funder that does not recognise the asset compensates by asking for more security, because security is what it reaches for when it cannot get comfortable any other way. The guarantee is often a symptom of the lender's uncertainty rather than a measure of the risk.

That is worth knowing before you accept the first structure offered. We know this market and we know specific people who have funded businesses like the one you are buying, so you can find out what is normal for your deal rather than assuming the first answer is the market. Read what lenders look for for what drives that assessment, and equity contribution for the other lever that moves it.