A guarantor loan, also known as a personal guarantee, is a type of loan where a third party, typically a family member or business director, agrees to cover the repayments if the borrower defaults. This option is often used among individuals with poor or limited credit history and businesses that lack strong financial accounts or collateral.
For UK business owners, especially those with weaker financials, personal guarantees enhance security for finance providers, increasing loan approval chances.
For businesses, guarantor loans (also referred to as Directors Personal Guarantees or DPG) are often used by directors seeking unsecured finance, where they personally act as the guarantor. This allows companies with limited trading history or no assets to secure loans they otherwise might not qualify for. Directors provide personal guarantees, meaning they take on legal responsibility for the loan if the business is unable to repay, making it an accessible option for start-ups or businesses looking for growth capital.
For new business owners who don't have assets like property to use as collateral, understanding all your financing options is crucial. If you're in this situation, check out our detailed guide on HOW TO GET FINANCE FOR YOUR NEW START BUSINESS FOR NON-HOMEOWNERS which explores alternative funding routes to help you secure the capital you need.
How Do Personal Guarantees Work?
A guarantor loan works by involving a third party, known as the guarantor, who agrees to cover repayments if the borrower is unable to do so. This type of loan is often requested by lenders during the proposal stage, though it can also be offered up front. In personal finance, such as loans for a car purchase, the guarantor typically lives at the same address as the borrower and is usually a close relative, like a parent or spouse.
In business finance, guarantor loans are more flexible, and the guarantor is often a business director or partner who personally guarantees the loan. The need for a guarantor is often flagged by your finance broker during the application process, especially if your business is new or has weaker financials. Acting as a guarantor can help businesses secure funding when assets or collateral are not available.
By providing a personal guarantee, business owners can secure funding even when their company lacks sufficient assets or collateral. This makes personal guarantees a valuable tool for accessing business loans and financing growth opportunities.
If you're considering applying for business finance and want to understand how the process works, see our BUSINESS FINANCE PAGE for more details on how to secure funding for your business.
Who Can Be A Guarantor For A Loan?
A guarantor is typically a close family member, such as a spouse or parent, who agrees to take responsibility for a loan if the borrower cannot repay. In business finance, it’s usually shareholders or directors who provide personal guarantees. While it’s possible for someone outside the organisation to act as a guarantor, this is rare and generally only seen with higher-cost finance providers where options are limited.
The ethics of offering guarantees for someone else’s business can be questionable, and at James Murray Finance, we strongly recommend exercising caution and seeking advice before agreeing to such terms. Always ensure you fully understand the risks involved in guaranteeing someone else's loan or a business you’re not directly involved with.
Does Being A Guarantor Affect Your Credit?
Being a guarantor doesn’t directly affect your credit score, provided the borrower keeps up with their repayments. As long as they are paying on time, your credit rating remains unaffected. However, it may be taken into consideration if applying for a mortgage. For specialist mortgage information, visit REBUS THE SPECIALIST MORTGAGE BROKER
⚠️ However, if the borrower fails to make repayments and you're called upon to cover the debt, you effectively inherit the debt, which could lower your credit score and limit your ability to borrow in the future. Before becoming a guarantor, it's therefore important to fully understand the financial responsibility you're taking on
It is common that before becoming a guarantor, the lender typically conducts a soft credit check, which won’t affect your credit score or be visible to other lenders. For more information on soft searches check out Experian's Guide on Searches and Credit Checks
What Are The Benefits Of A Guarantor Loan?
A guarantor loan can be highly beneficial for both the guarantor and the borrower, especially in a business context. For the borrower, it allows businesses with limited credit history or weaker financial accounts to access funding that might otherwise be unavailable. This can be particularly helpful for start-ups or businesses that don’t have substantial assets for traditional loans, enabling them to secure capital to grow or maintain operations.
💡For the guarantor, typically a director or shareholder, acting as a guarantor can strengthen the business’s ability to obtain vital funds. By providing a personal guarantee, they help the company secure financing on more favourable terms. This can improve cash flow and support long-term growth, benefiting both the guarantor and the company if the business thrives.
However, guarantors should weigh the risks, as they take on financial responsibility if the business cannot repay. At James Murray Finance, we can guide you through these decisions to ensure you understand the benefits and risks involved with personal guarantees and guarantor business loans.
What Are The Risks When You Guarantee A Loan?
While a guarantor loan can offer valuable financing options, it comes with significant risks. As a guarantor, you are legally responsible for repaying the loan if the borrower defaults, which could impact your personal finances and credit score. If the loan falls into default, you may be required to cover all outstanding payments, potentially leading to debt issues.
Before agreeing to become a guarantor, it’s crucial to fully understand the financial commitment and potential consequences. For more details on the risks and responsibilities, visit the Financial Ombudsman’s guide on being a guarantor
Weighing the risks and benefits of being a guarantor
💡 Benefits of Being a Guarantor for a Business Loan:
Unlock business financing: Allows the business to access funds that might otherwise be out of reach.
Contribute to business growth: Helps support the company's long-term success and potentially improves its financial standing.
Improved borrowing terms: Can lead to better loan terms for the business.
⚠️ Risks of a Personal Guaranteeing a Finance Agreement
Liability for repayments: If the borrower defaults, you are legally responsible for the outstanding balance.
Impact on credit score: Defaulting on repayments can damage your credit score, making future borrowing harder.
Financial instability: You could face significant personal financial challenges if you’re required to cover the debt.
At JAMES MURRAY FINANCE we can help you navigate these decisions with the right advice and support.
Yes, a guarantor can be a family member, and in many cases, they often are. For personal loans, it’s typically a close relative like a parent or spouse. In business finance, a guarantor is usually a director or shareholder, but it’s possible for a family member to act as one if they are willing to take on the financial responsibility.
However, anyone considering becoming a guarantor should fully understand the risks involved, as they would be liable if repayments aren’t made. To enquire about finance Get in Touch
Yes, a guarantor can be retired, as long as they meet the lender’s financial criteria. Typically, this means the retired guarantor must have a stable income, such as a pension, and a good credit history to demonstrate their ability to cover repayments if needed. Lenders will assess their financial circumstances to ensure they can take on the responsibility if the borrower defaults.
To learn more about your credit score you can get a report and FREE 30 day trial from CHECK MY FILE who collate data from the three major UK credit Bureaus, Experian, Equifax and TransUnion
Alternatively, CREDIT KARMA offer a free subscription service to keep tabs on your credit profile and offers credit tips along the way.
Yes, being a guarantor can affect your ability to get a mortgage. While it doesn’t directly impact your credit score if the borrower makes repayments on time, lenders may view your role as a guarantor as a potential financial liability. This could affect your affordability assessment for a mortgage, as the lender may consider the possibility that you could be called upon to repay the loan. If you are required to step in and cover repayments, it could also impact your credit score and future borrowing capacity.
However, car finance is tied to a specific vehicle. Therefore, the new loan would still be linked to the car, and the usual credit checks and vehicle condition assessments would apply.
Refinancing can be advantageous if rates have decreased since your original loan. However, it's important to consider any potential fees or changes in terms before proceeding. Before refinancing your loan, make sure to explore ways you can save money on your car financing.
I hope you found this useful. Keep in touch with James Murray Finance for free business and car finance insights and updates. Subscribe to the blog via LinkedIn HERE or follow on social media.
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Thank you for reading
James
Disclaimer: This blog post is intended for informational purposes only and does not constitute financial advice. All information is collated at time of writing and the best efforts have been made to ensure accuracy.
Meet James, the founder of James Murray Finance. With nearly two decades of industry experience and eight years dedicated to the finance sector, James has worked with a wide range of businesses, from startups to established enterprises. Read More >
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