Personal guarantees are negotiable

A personal guarantee is a negotiable term, not a box to tick. It is a promise by a director to cover a shortfall the company cannot, and its scope is almost always movable. Capping the amount, time-limiting it, and trading it against pricing or security are how a borrower keeps personal exposure finite. As credit tightened sharply through 2022, guarantees returned to lower-mid-market term sheets; how they are scoped now matters more than whether they appear.

For two years, much of the lower-mid-market borrowed under government schemes that explicitly prohibited personal guarantees on smaller facilities. That backstop has gone. As the schemes wound down and ordinary lending resumed into a far harder market, the personal guarantee returned to the term sheet as a matter of course. Not because any individual business had weakened; lenders across the market were repricing risk at once.

The speed of that repricing is the part worth seeing plainly. On Deloitte’s CFO Survey, finance directors’ reading of the cost of new credit went from barely a concern through 2021 to its least attractive since 2009 by the fourth quarter of 2022. Credit did not just get dearer; it got dearer faster than at any point in over a decade, and a lender repricing that quickly reaches for every form of protection available, the guarantee among them.

Price was only half of it. Availability tightened in step: by the end of 2022, 45% of CFOs said new credit was simply hard to get, against a comfortably positive picture a year before. When both the cost and the supply of credit move against the borrower at once, a lender’s appetite for security rises. The guarantee is the cheapest security a lender can ask for; it costs the lender nothing to write down.

What does a personal guarantee actually secure?

Start with what it is, because the word does more work than the document often does. A personal guarantee is a contractual promise by an individual, typically a director or owner, to meet the company’s obligation if the company defaults and the lender is left short. It does not transfer the company’s debt to the individual at the outset; it sits behind the company, taking effect only on a shortfall after the lender has pursued the business and its own security. The exposure is real, but it is contingent, and its size is a matter of drafting.

That last point is where most of the value sits. An unlimited, all-monies guarantee covering every present and future liability of the company is a very different instrument from one capped at a fixed sum, limited to a single named facility, and released once leverage falls below an agreed level. Both are called “a personal guarantee” in conversation. Only the second leaves the director with a known, finite number. The gap between the two is decided in negotiation, not by the nature of guarantees as such.

Which terms move, and what do you trade for them?

Four levers do most of the work. The cap fixes the maximum the director can be pursued for: the single most important term, and often movable from “unlimited” to a defined sum. Scope limits the guarantee to one facility rather than all company borrowing. A reduction mechanism steps the cap down as the loan amortises or as covenants are met. And a release condition ends the guarantee outright once the company clears an agreed leverage or coverage test, so it does not outlive the risk it was written to cover.

None of these is free, and none should be conceded for nothing. A lender that drops or caps a guarantee will often want something in return: a few basis points on the margin, a tighter covenant, additional company security such as a debenture. That is the trade to run deliberately: a well-secured lender has less need of a broad personal guarantee, so the company’s own assets and the director’s personal exposure are substitutes that can be balanced against each other and against price. Run it as one negotiation rather than a list of separate concessions; that is where an adviser earns their keep.

When is a guarantee reasonable, and when should you push back?

A guarantee is reasonable when it is proportionate to the lender’s genuine residual risk after its company security, and unreasonable when it is a default term applied without thought. A modest, capped guarantee on a £4m facility to an owner-managed business with limited tangible security is an ordinary ask. An unlimited, all-monies guarantee on a well-secured, cash-generative credit is not: it is the lender taking protection it does not need because the borrower did not ask why. The test is not whether a guarantee appears, but whether its scope is matched to the risk that remains once everything else has been pledged.

The practical discipline is the same one that governs the rest of a debt raise. Read the guarantee as carefully as the margin, treat every limb of it as negotiable until a lender tells you otherwise, and where more than one lender wants the business, let the breadth of the guarantee be one of the things they compete on. A personal guarantee handled that way is what it should be: a contained, deliberate backstop. Handled as boilerplate, it is an open-ended claim on personal wealth that nobody actually priced.