Directors should think twice before waiving limited liability
Should small-business directors ever provide a personal guarantee in return for bank finance?


Small businesses planning for 2024 may be hoping to borrow to fund their strategies for growth and expansion. But overly cautious banks are too often demanding personal guarantees from the directors of companies arranging finance, warns the Federation of Small Businesses (FSB). It has filed a “super-complaint” with the Financial Conduct Authority (FCA), the City regulator, asking it to investigate such practices.
The FSB is particularly concerned that banks are targeting directors of limited liability companies, where directors are largely protected from personal liability for debts incurred by their firms. When a bank demands a personal guarantee from the directors, this undermines the protection that the limited-liability structure is supposed to provide. Some businesses may decide this is a risk they don’t want to take, hampering their ability to grow. Others may go ahead, putting the directors in a vulnerable position.
The FCA will respond to the complaint in the coming months. But in the meantime, should small-business directors ever provide a personal guarantee in return for bank finance?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
There isn’t a right or wrong answer to this question, but it is vital that you do not sign up for such arrangements without understanding all the implications, including the fine print of the financing. In practice, this makes it important to seek independent legal advice on the loan contract.
Above all, you must recognize that by signing up for a personal guarantee, you are promising the lender that you will take responsibility for the debt of the business if it can’t pay what it owes. That gives the lender the right to come after your assets – typically without a court order – if the business defaults. Those assets could even include your home. Moreover, if you don’t have sufficient assets to repay the loan in full, you could face bankruptcy and disqualification from serving as a director for a period. Even if you can cover the losses, your personal credit rating will be adversely affected, with potential consequences for the rest of your family finances.
If you do decide to accept a personal guarantee, study the terms carefully. For example:
- Under what circumstances can the lender call the guarantee in?
- How does it define a default on the debt?
- Are you required to indemnify the lender against additional costs?
- How will defaults be enforced, and what assets could the lender demand from you?
- What rights does the lender have to demand immediate repayment of its loan?
In an ideal world, you may be able to avoid these difficulties by offering company security in return for finance, rather than your personal assets. If not, your legal team may be able to secure some protection – a limit on your personal liability, for example, or a commitment that calls will only be made on the guarantee as a last resort. The question of how liability will be shared by several directors should also be assessed.
Finally, it may be worth considering personal-guarantee insurance. This cover, available from specialist small-business brokers and insurers, pays out to help directors repay the company’s debt without having to give up their own assets. It effectively underwrites the personal guarantee you’re being asked to provide.
This cover can prove very valuable, particularly if your business suffers something completely unexpected that causes it difficulties. However, the premiums can be expensive, particularly for firms with weaker finances.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Related articles
- The best business bank accounts
- How to find an angel investor for your business
- Beware of scams on your business’s Facebook account
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
-
When is the “Bed & ISA” deadline? Cut-off dates for major investment platforms
The “Bed & ISA” deadline varies from provider to provider. We share a round-up of the key dates across major investment platforms
By Katie Williams Published
-
Spring Statement: what could Rachel Reeves say about pensions?
The chancellor will deliver her Spring Statement on 26 March. We look at whether there will be any announcements on pensions that could affect savers or retirees
By Ruth Emery Published
-
Return to the office: is working from home coming to an end?
More and more employers want their staff to return to the office. Is it a good idea?
By David Prosser Published
-
Europe prepares to stand alone as Trump turns on Ukraine
Support for old military alliances is wavering in the US under Donald Trump. Europe’s leaders are rushing to fill the void. Simon Wilson reports
By Simon Wilson Published
-
Volodymyr Zelenskyy moves to appease Donald Trump – what happens now?
Ukraine’s president Volodymyr Zelenskyy is conceding ground to secure the least-worst deal possible, says Emily Hohler
By Emily Hohler Published
-
Kirill Dmitriev: from Wall Street banker to Putin’s emissary to Trumpworld
Profile Kirill Dmitriev is a product of America’s finest institutions and has emerged as the Russian president’s point man in negotiations with Donald Trump
By Jane Lewis Published
-
Key takeaways from the 2025 German election results
Friedrich Merz heralds a new era for Germany, after the German elections revealed a majority of young voters are leaning towards the far-right
By Emily Hohler Published
-
Is Rachel Reeves leading the UK to a spring crisis?
Opinion Rachel Reeves is sleepwalking into an economic catastrophe of her own making. Don’t expect a change of direction, says Matthew Lynn
By Matthew Lynn Published
-
Will Labour rethink the Chagos Islands deal with Mauritius?
Labour hailed its agreement to hand control of the Chagos Islands to Mauritius as a diplomatic coup. The reality is more woeful, says Simon Wilson
By Simon Wilson Published
-
No need to run from the robots: Nobel laureate Daron Acemoglu talks to MoneyWeek
Interview Daron Acemoglu, Nobel Prize winner and professor at MIT tells Matthew Partridge why the gains from AI have been overhyped
By Dr Matthew Partridge Published