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Bank Guarantee

Providing a guarantee for your loan

Banks and other lenders are often unwilling to lend money to a new business with no financial track record.

However, even if it does agree to lend you money, your lender may require a loan guarantee.

Lenders commonly ask for assets, such as property, as loan guarantees. They may also ask another person or another business to guarantee the loan. The guarantee means that the lender will claim on the person providing the guarantee if your business cannot meet the repayments.

A loan guarantee could be obtained from:

You, if you run a limited company
People involved in the business
An external guarantor - such as a business person who does not want to make a direct investment but may be willing to take the risk of giving a guarantee

You may have to pay a provider of a loan guarantee a regular fee or a one-off premium - usually about 2 or 3 per cent of the loan amount.

Some loan providers require you to take out loan repayment insurance to cover repayments if your business meets cashflow problems. You could consider this as security for yourself even if it is not required. However, you need to include the cost of this in your total borrowing cost and weigh it against the risk of failing to meet the terms of your loan. If you are using a financial broker, you can ask them to advise on the best insurance deal.
Personal guarantees and limited liability

If you operate a limited company and your business is new - with no track record - banks and major creditors will usually require personal guarantees from the backers of your business. This may be either the directors, including you, or major shareholders but is often both.

Limited liability generally protects shareholders from being sued by the business' creditors for their personal assets. However, where a personal guarantee for a bank loan is issued, the individual can be held personally liable for the debt.

You should always be careful when giving personal guarantees. Where possible ensure that they only apply to specific debts or loans. A widely drawn guarantee could render you liable for all of the losses of the business. However, under the Lending Code, guarantees given in support of bank account borrowing must not be for an unlimited amount.
Standards of conduct for lenders

The Lending Standards Board has replaced the Banking Code Standards Board. The British Bankers' Association, Building Societies Association and UK Cards Association Lending Code aims to ensure that business standards are maintained when providing overdrafts, unsecured loans and credit cards to personal and small business customers. Under the code, you can access information on how credit assessment must be carried out and how to manage cases of financial difficulty.

The code also makes new requirements on risk-based repricing, a period of grace for credit card customers in financial difficulties, and good practice for dealing with customers with a mental health condition who are in financial difficulties.