Directors should think twice before waiving limited liability

Should small-business directors ever provide a personal guarantee in return for bank finance?

model of house next to coins
(Image credit: Getty Images)

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. 

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

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

Sign up
  • 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

Explore More
David Prosser
Business Columnist

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.