Startups and SMEs without an established trading history may find it difficult to obtain credit from banks or enter into deals with landlords and suppliers. In order to solve this problem, personal guarantees may be used. A personal guarantee is where one or more company directors personally guarantees to repay any debts of their business if the company is unable to meet its financial obligations, effectively putting their own personal assets at risk. A director's personal guarantee may be used in a variety of situations, including:
- bank loan or overdraft applications
- invoice financing (discounting and factoring) arrangements
- commercial property (eg where a business is a tenant)
- trade supply deals (eg where payment is not made in advance)
- investment deals
There is sometimes a cap applied to directors personal guarantees, which allows the director to limit the potential level of their financial liabilities.