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“It’s just a formality.” That’s what the broker says as you sign the loan facility for your new van, your stock, or your office fit-out. The paperwork is thick, the language dense, and you’re focused on getting the funds to move your business forward.

But if you spend time on UKBusinessForums or debt advice subreddits, you’ll see the reality behind the formality. Business owners—who thought their Limited Company protected them—losing their family homes because they signed a “Personal Guarantee” (PG) years ago, often without realising the full risk.

The “Limited” in “Limited Company” is meant to shield your personal assets. The Personal Guarantee quietly removes that shield, exposing your home, savings, and future to the lender’s reach.

Who Needs to Pay Attention?

• Sole Directors and company owners

• Partners in LLPs or traditional partnerships

• Franchisees taking on finance for fit-outs or equipment

• SME owners applying for bounce-back loan successors, asset finance, or overdrafts

If you’re signing for business finance, you’re in the firing line.

The Fine Print That Costs You Your House

1. The Unlimited Personal Guarantee

The Scenario:
You borrow £50,000 for your business and sign a PG. The business fails. With interest, legal fees, and enforcement costs, the debt balloons to £75,000. You thought you were only on the hook for the original £50k, but the PG was “all monies”—covering not just the loan, but any future borrowing, interest, and costs.

Why It’s a Killer:
“All monies” guarantees are open-ended. You could be liable for debts you never even knew about, including future loans or overdrafts you didn’t personally authorise.

What to Do:

• Negotiate a “Capped Guarantee”: “I guarantee this loan up to a maximum of £50,000 and no more.”

• Avoid “all monies” guarantees wherever possible. If the lender insists, get clarity on exactly what’s covered.

2. The “Cross-Default” Trigger

The Scenario:
Your business is up to date on the loan, but you miss a payment on a completely unrelated business credit card. The loan agreement has a “Cross-Default” clause. The lender sees the missed payment, declares you in default on the main loan, and demands full repayment immediately. You can’t pay, so they call in the Personal Guarantee.

Why It’s a Killer:
A single slip-up elsewhere can trigger default on your main loan, even if you’ve never missed a payment on it.

What to Do:

• Ensure “Default” is limited to this agreement, or to non-payment of significant debts (e.g., over £5,000), not just a missed £50 payment on a credit card.

• Ask for written notice and a chance to remedy any default before the guarantee is called in.

3. Financial Covenants (The “EBITDA” Trap)

The Scenario:
You have a loan with a covenant: “Net Debt must not exceed 3x EBITDA.” You have a bad quarter, EBITDA drops, and you breach the covenant. You haven’t missed a payment, but the lender can call in the loan anyway.

Why It’s a Killer:
Covenants are often technical and easy to breach, even if your business is fundamentally sound.

What to Do:

• Ask for “headroom” in your covenants, so you’re not tripped up by minor fluctuations.

• Ensure there’s a “Cure Period” (e.g., 30 days) to fix the ratio by injecting cash or restructuring before the lender can call the loan.

4. Director’s Home Charging Order

The Scenario:
You sign a PG with a clause: “The Guarantor charges any interest in any property held now or in the future.” The business fails. The lender doesn’t just sue you—they go straight to the Land Registry and put a “Charging Order” on your house. You can’t sell or remortgage until you pay them.

A devastating forum post: “I thought I was signing as a Director, but the bank is now putting a charging order on my house. Is this legal?” Yes—if you signed as “Guarantor,” you’ve personally guaranteed the debt.

What to Do:

• This clause is hard to remove from bank loans, but be aware of it. If your home is jointly owned, your spouse may need to sign (or refuse to sign).

• Independent Legal Advice (ILA) is usually required—listen carefully to what the solicitor tells you, and don’t be afraid to walk away if you’re not comfortable.

Other Common Pitfalls

• Multiple Guarantees: You may be asked to sign more than one PG for different facilities—each one is a separate risk.

• Joint and Several Liability: If you’re in business with others, you could be liable for the full debt, not just your share.

• Renewals and Top-Ups: Some lenders sneak in new PGs when you renew or increase a facility—always check what you’re signing.

Why AI Legal Contract Review Helps Borrowers

When you need cash, you’re often desperate and gloss over the risks. A solicitor costs money you don’t have, and the paperwork is intimidating.

AI contract review is the cool head in the room. It highlights “Unlimited Personal Guarantee,” “Charge on Property,” and “Cross-Default” in seconds. It forces you to confront the risk: “Am I willing to bet my house on this clause?” Sometimes the answer is yes, but it should always be a conscious, informed choice—not a nasty surprise years down the line.

Final Thought

Personal Guarantees are not just a formality—they’re a bet on your future. With the right knowledge and tools, you can protect your home, your family, and your peace of mind.Disclaimer: This content is for general information only and does not constitute legal, financial, or tax advice. Outcomes may vary depending on your individual circumstances.