Personal Guarantee Insurance is a type of insurance designed to protect individuals who provide personal guarantees for business loans or other financial arrangements.
In these situations, the guarantor is typically liable for the full amount of the loan if the borrower defaults, which can leave them financially vulnerable. Personal Guarantee Insurance can help mitigate this risk by providing coverage for a portion of the guaranteed amount in the event of default.
This type of insurance is often purchased by small business owners, entrepreneurs, or investors who may need to provide personal guarantees to secure financing.
By obtaining Personal Guarantee Insurance, these individuals can protect themselves and their personal assets from potential financial harm in the event of a default.
If your business has no assets and you wish to apply for finance, the bank or finance provider is likely to request that a personal guarantee is signed. Usually signed by a company director, this means that the loan is guaranteed by the individuals personal assets, commonly a house.
What is Personal Guarantee Insurance
Personal guarantee insurance protects the guarantor in the case of the loan being called in, offering peace of mind in the meantime. With many lenders requesting a personal guarantee before approving finance, they are commonplace and not, in themselves, problematic. It is important to realise, however, that personal guarantees are legally binding and, as such, taking insurance at the point of signing can be a worthwhile endeavour.
A Personal or Directors Guarantee is an unsecured ‘promise’ from a business owner or director to guarantee that payment for a loan will be made by them in the event that their business is not able to pay. This is why, when raising finance, a lender will often ask for a Personal Guarantee to provide additional security. Often, without this, the finance cannot be secured.
The assumption by the business owner/director is, of course, that signing the Personal Guarantee carries little to no risk as the business will provide. However, unforeseen circumstances can arise and that is where Personal Guarantee Insurance steps in: to eliminate the risk to the director’s personal estate.
How Does Personal Guarantee Insurance Work?
Applying for the insurance is straightforward via a simple online form. The level of cover available will differ, depending on whether your personal guarantee is against a secured or an unsecured loan. Once you’ve submitted the application, the insurers will assess your circumstances and provide you with a policy to review.
Nobody needs to take out Personal Guarantee Insurance. It is a choice you make to protect yourself in the event that your business is unable to repay the finance it has committed to. The fact is that any form of borrowing above £5,000-£10,000 may require additional security in the form of a personal guarantee. And this could be on top of the standard asset-based security.Should your business be unable to pay back its debt in full, you (and your personal assets) are immediately liable as a guarantor – and this is where PGI could offer you some protection.
What are they key features?
- An Annual Insurance Policy, regulated by the FCA
- The level of risk and individual circumstances determine the price
- Insurance is available to directors of limited companies or partners of an LLP – you can insure multiple guarantors on a single policy
- It is available for personal guarantees against secured and unsecured loans
- Cover is based on a fixed percentage of the guarantee amount – usually a low percentage and never to cover the full amount. The maximum is 80%. Over time, the cover rises as the business become more stable and show they are less risky to the lender.
Advantages of Personal Guarantee Insurance
Personal Guarantee Insurance provides several advantages for individuals who are considering providing a personal guarantee for a business loan or financial arrangement. Some of the advantages include:
- Financial protection: Personal Guarantee Insurance can provide coverage for a portion of the guaranteed amount, which can help protect the guarantor’s personal assets in the event of a default.
- Risk mitigation: By obtaining Personal Guarantee Insurance, individuals can mitigate the risk of providing a personal guarantee and potentially facing significant financial consequences in the event of a default.
- Improved borrowing capacity: Having Personal Guarantee Insurance in place can improve an individual’s borrowing capacity, as it may make them a more attractive candidate for a loan or financial arrangement.
- Peace of mind: Personal Guarantee Insurance can provide peace of mind for individuals who are considering providing a personal guarantee, as it can offer protection and security in the event of a default.
Overall, Personal Guarantee Insurance can be a valuable tool for individuals who are looking to protect themselves and their personal assets when providing a personal guarantee for a business loan or financial arrangement.
What Percentage Does Personal Guarantee Insurance Cover?
The maximum available is 80%, but during the first year of cover the figure is closer to 60%. Over time, the cover rises as the business proves its stability and the risk for the lender drops.
Who Pays the Insurance Premium?
Since personal guarantee insurance is usually taken to cover commercial finance, the associated costs can be covered by the business. This is a commonly asked question as directors are rightly concerned that they might have to pay the premium themselves, despite the finance being needed for business purposes. Because the insurance is covering a business loan, the premium payments are a business expense.
Can Personal Guarantee Insurance cover more than one person?
Yes, it can protect you and other guarantors. These might be business partners or other directors. The director with the largest shareholding must be named first with all other directors endorsed.
What is the maximum limit of indemnity?
We work with a leading UK insurer to arrange Personal Guarantee policies up to the value of £300,000. Consideration can be given to £400,000 but is subject to your credit score and insurer acceptance.
Frequently asked questions
You can buy personal guarantee insurance from companies such as Towergate Insurance Brokers. Where to buy personal guarantee insurance
Should Directors take out Personal Guarantee Insurance?
Being regulated and licensed insolvency practitioner, we hear from directors facing financial struggles on a daily basis. When you have a Limited Company structure, you are prevented from your own personal possessions being taken. When you take out PGI, this changes. The corporate veil is lifted, meaning there is no separate legal entity for the director and the company, instead they are seen as one. From this, directors see their company liquidated, which could lead to personal bankruptcy.
Taking out personal guarantee insurance prevents this. It protects your personal possessions if ever a situation like this occurs. However, it is not cheap and it might be a drain on yours or the company’s cashflow. At least the choice is there.
Conclusion
Personal Guarantee Insurance is an important protection tool for individuals who provide personal guarantees for business loans or other financial arrangements. Without this type of insurance, guarantors can face significant financial risk if the borrower defaults, which can lead to financial ruin and other negative consequences. Personal Guarantee Insurance is designed to mitigate this risk by providing coverage for a portion of the guaranteed amount, which can help protect the guarantor’s personal assets and financial well-being.
By obtaining Personal Guarantee Insurance, individuals can make sure that they are protected in the event of a default, which can provide peace of mind and greater financial security. Ultimately, Personal Guarantee Insurance can help ensure that individuals are able to provide personal guarantees without putting themselves and their financial stability at risk.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.