Personal guarantee insurance: what you need to know

Taking out personal guarantee insurance protects business owners and directors if a company can’t honour its financial commitments. This blog will explore what personal guarantees are and how personal guarantee insurance can provide protection and peace of mind.

What is a personal guarantee?

Business owners and company directors may be asked to provide a personal guarantee during the process of applying for a business loan.

In the event of the business falling into hardship and becoming unable to fulfil its financial obligations, a personal guarantee means the business owner or director is liable to cover payments out of their own pocket, or their personal assets can be seized to cover debts or missed payments.

In signing a personal guarantee, the company owner or director in question becomes the guarantor for a business loan.

Personal guarantees can help new companies or directors with a lack of credit history or business assets access loans to help with startup costs.

A personal guarantee is a kind of legally binding contract between a lender and a director wishing to apply for credit for his or her business.

Generally, a personal guarantee won’t affect your credit score or rating unless you fail to make payments on time or at all.

What is personal guarantee insurance?

Personal guarantee insurance enables you to insure against a personal guarantee. For example,

Scenario 1 – NO PG Insurance
Business Loan from Bank £100,000
Personal Guarantee requirement from the bank £100,000

Total Exposure to you £100,000

Scenario 2 – WITH PG Insurance
Business Loan from Bank £100,000
Personal Guarantee requirement from the bank £100,000
Personal Guarantee Insurance (typically 60% of PG) £60,000

Total Exposure to you £40,000

Insuring your personal guarantee protects you, your finances, and your assets should the worst happen to your business. In the event of your business failing to cover bills and other funds due, your personal guarantee insurance policy will help you meet these costs and safeguard your own savings.

Post-pandemic, lenders are likely to apply stricter criteria for company loans, so personal guarantees will become even more commonplace for business owners looking to access credit.

Crucially, you can take out personal guarantee insurance against secured and unsecured loans, and you can insure more than one personal guarantor on a single personal guarantee insurance policy.

How does personal guarantee insurance work?

Personal guarantee insurance protects business owners and directors who take out loans with personal guarantees. In the event of a personal guarantee coming into play following the failure of a business to meet its financial costs, personal guarantee insurance will help you to cover expenses without having a detrimental impact on your personal finances because the insurance company will pay out a percentage of the costs to help you cover monies owed.

You can choose what percentage of your personal guarantee you insure, up to a maximum of 80%, with varying levels of cover available to suit your circumstances.

Most personal guarantee insurance policies start at around 60% and can increase to 80% over several years. However, the maximum cover is 80%, and you can’t cover 100% of your personal guarantee through a personal guarantee insurance policy.

Taking out personal guarantee insurance is a simple process, and you can take it out for new or existing personal guarantees.

As it’s a business expense, you can pay for personal guarantee insurance through your business if you wish to do so.

Why do I need personal guarantee insurance?

Here are three significant benefits of taking out personal guarantee insurance:

• Gain financial protection for your business
• Safeguard your personal assets
• Enjoy peace of mind
• Protect your family finances
• Minimise stress in the event of business failure

How do I take out personal guarantee insurance?

Applying to secure a personal guarantee insurance policy with Financial Affairs is easy. Get in touch to organise a free consultation to find the right insurance policy for your personal guarantee.

You can reach us on 01282 452255 or hello@financialaffairs.co.uk

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