If your bank agrees to lend you money, it may require a guarantee. A guarantee is a promise by a person or an entity to assume a debt obligation in the event of non-payment by the borrower. Your loan agreement should make it clear exactly what security the bank needs.
Guarantees can be provided by:
- you, if you run a limited company
- other people involved in the business
Banks may also ask another person or business to act as a guarantor. If you cannot meet your repayments, the guarantor may have to pay part or all of the loan or interest.
If you operate a limited company, banks and major creditors will usually require personal guarantees from the company directors or major shareholders.
Limited liability protects shareholders from being sued by the business' creditors for their personal assets. Where a personal guarantee for a bank loan is issued, the guarantor can be held personally liable for the debt.
If possible, ensure that personal guarantees only apply to specific debts or loans as a widely drawn guarantee would render you liable for all of the losses of the business up to the amount of the guarantee. Under the lending code, guarantees given in support of bank account borrowing must not be for an unlimited amount.
Also see prepare your business for bank financing.
The Enterprise Finance Guarantee
If you need funding for your business, but cannot secure a loan, you may be eligible the British Business Bank’s Enterprise Finance Guarantee (EFG).
EFG facilitates lending to smaller businesses that are viable but unable to obtain finance from their lender. Support includes:
- term loans
- revolving facilities, such as overdrafts
- invoice finance facilities
- asset finance facilities
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