Navigating business finance can be daunting, especially when personal guarantees are involved.
Signing a personal guarantee means your personal assets could be at risk if your business defaults on its financial obligations.
This is where Personal Guarantee Insurance (PGI) steps in, offering a safety net by providing partial protection for your personal assets.
This guide will explore the benefits and limitations of PGI and offer practical steps to help you secure this insurance, ensuring you make informed decisions with confidence.
A personal guarantee is a legal commitment made by an individual, typically a company director, to repay a business debt if the company itself cannot. This means that, once you’ve signed a personal guarantee, you are personally responsible for settling the debt if your business defaults on a loan or other financial obligation. Lenders often require personal guarantees to reduce their risk, especially with small businesses or startups that may not have substantial assets or credit history.
By signing a personal guarantee, you expose your personal assets, such as your home, savings, or other valuables, to potential claims by creditors. This can be a significant risk, as it blurs the line between your business and personal finances.
Directors might be asked to sign personal guarantees in various scenarios, including:
Business Loans: Lenders may insist on a personal guarantee to secure the loan when seeking funding for expansion or operational costs.
Overdrafts: Banks may require a personal guarantee for overdraft facilities to ensure repayment.
Lease Agreements: If your business is leasing property or equipment, landlords or lessors might ask for a personal guarantee to safeguard against default.
Understanding these commitments is crucial. While they can facilitate access to necessary capital, they also carry the risk of personal financial exposure. Always consider the implications carefully and consult with financial advisers before agreeing to such terms.
What Is Personal Guarantee Insurance?
Personal Guarantee Insurance (PGI) is designed to protect UK business directors who have signed personal guarantees for their company’s financial obligations. By signing a personal guarantee, you agree to cover the company’s debt if it defaults. PGI provides a safety net by offering partial reimbursement if this guarantee is called in, reducing your financial risk.
A PGI does not eliminate your liability but acts as a buffer, helping to mitigate the impact on your personal finances. For instance, if your company defaults on a loan and the lender calls in your personal guarantee, PGI can cover a portion of the amount you owe. This coverage is typically subject to caps or percentages, meaning it will not cover the entire liability, but can significantly ease the financial burden.
By offering this partial protection, PGI can be an invaluable tool for directors who want to safeguard their personal assets while supporting their business’s financial needs. However, reviewing the policy details carefully is crucial, as coverage limits and conditions can vary between providers.
Why Directors Might Need PGI
Directors might consider Personal Guarantee Insurance (PGI) for several compelling reasons, primarily revolving around the protection of personal assets and peace of mind. When you sign a personal guarantee, your personal wealth, including family homes and savings, could be at risk if the business defaults on its obligations. PGI can offer a safety net, ensuring that your personal finances are not entirely exposed to business risks.
Here are key motivators for opting for PGI:
Risk Management: PGI helps manage the risk associated with personal guarantees by providing financial coverage if the guarantee is called upon.
Company Volatility: In industries prone to economic fluctuations, PGI can act as a buffer against unforeseen downturns that could affect business stability.
Protection of Personal Wealth: By safeguarding your assets, such as your home or savings, PGI ensures that business liabilities do not jeopardise your personal financial security.
Peace of Mind: Knowing that a layer of protection is in place can alleviate stress and allow you to focus on running the business effectively.
Family Security: Protecting your family’s home from being used to settle business debts can provide significant emotional and financial relief.
Ultimately, PGI serves as a strategic tool for directors who wish to shield their personal finances while navigating the complexities of business operations.
How PGI Works: Coverage, Costs, and Indemnity
Personal Guarantee Insurance (PGI) provides a safety net for directors who have given personal guarantees on business finance. PGI typically covers between 60% and 80% of the outstanding guarantee. If your company defaults, the insurance can reimburse a significant portion of the debt you owe.
Coverage Limits
The coverage limit is crucial as it determines the maximum amount the insurer will pay. PGI does not cover the entire guarantee, leaving you with some risk. For example, if your guarantee is £100,000 and your policy covers 70%, the insurer would cover up to £70,000.
Premium Factors
Premiums for PGI depend on several factors:
Company Finances: A stable financial history can lower premiums.
Sector Risk: High-risk industries may face higher premiums.
Director’s Creditworthiness: A strong credit score can reduce costs.
These elements collectively determine your annual policy cost.
Conditions of Indemnity
Indemnity conditions specify when and how claims are paid. PGI typically indemnifies after the lender calls in the guarantee and you make a claim. Ensuring all policy conditions are met is vital to avoid claim rejection. Understanding these terms helps protect your personal assets effectively.
Steps to Buy PGI
Acquiring Personal Guarantee Insurance (PGI) involves a structured process to ensure you meet the requirements and understand the policy terms. Here is a step-by-step guide to help you navigate the process:
Application: Start by choosing a reputable insurer or broker. Complete an application form, typically requiring details about your business and the specific personal guarantee you wish to insure.
Required Documentation: Submit key documents such as financial statements, personal credit history, and details of the loan or financial facility linked to the personal guarantee. This information helps insurers assess the risk involved.
Underwriting Process: Insurers will evaluate your application through underwriting, focusing on factors like your company’s financial health, sector risk, and creditworthiness. This step can take several days to weeks, depending on the complexity of your case.
Approval and Policy Issuance: Once approved, you will receive a policy document outlining the coverage details, including any exclusions or limits. Review this carefully to ensure it meets your needs.
Finalising the Policy: After agreeing to the terms, you will pay the premium, and the policy will become active. Keep a copy of all documents for future reference.
Timeline Summary
Application Submission: 1–2 days
Underwriting Review: 7–14 days
Policy Approval and Issuance: 3–5 days after underwriting
Key Considerations, Pitfalls & Limitations
When considering Personal Guarantee Insurance (PGI), it is crucial to understand its limitations and avoid common pitfalls. PGI does not cover all liabilities; it typically only covers a portion of the personal guarantee, not the entire amount. Misunderstanding this can leave you unexpectedly exposed.
Be aware of coverage caps, which limit the maximum payout. These caps mean that even if your liability is significant, the insurer will only pay up to a certain amount. Always check these limits to ensure they meet your needs.
Renewal terms are another area where directors often falter. Policies may change upon renewal, affecting coverage and costs. Reading and understanding these terms is essential each time your policy is renewed.
Importantly, PGI does not cover liabilities arising from fraud or deliberate misrepresentation. If a director is found guilty of such actions, the policy could be voided retrospectively, leaving you without protection.
Policy exclusions can also catch you off guard. Common exclusions include liabilities related to regulatory fines or intentional misconduct. Always review policy terms thoroughly to understand what is and is not covered.
How to Apply for Personal Guarantee Insurance?
Here at Company Debt, we’re partnered with one of the oldest and most trusted PGI providers in the UK, Purbecks. Applying for personal guarantee insurance with Purbecks is a straightforward process. Here’s how to get started:
Protection in case of insolvency: If your business becomes insolvent and your personal guarantee is called in, Purbecks will be there to support you.
Apply online: To begin the process, visit Purbecks’ website and complete the online application form. The form will require some basic information about you and your business, including the amount of the personal guarantee you wish to insure.
Get a quote: Once you’ve submitted your application, Purbecks will calculate your annual insurance premium based on your individual circumstances and requirements.
Annual coverage: Purbecks provides personal guarantee insurance on an annual basis, meaning you’ll need to renew each year.
A fixed percentage of coverage: Purbecks’ level of coverage is based on a fixed percentage of the personal guarantee and is determined based on your individual circumstances.
Alternatives to PGI
If you are a director looking to reduce personal liability without relying on Personal Guarantee Insurance (PGI), there are several alternatives to consider:
Negotiating Limited Guarantees: Instead of agreeing to an unlimited personal guarantee, you might negotiate with lenders for a limited guarantee. This caps your liability to a specific amount, providing more precise boundaries on your financial exposure. However, lenders may require additional assurances or higher interest rates in exchange for this concession.
Using Company Assets as Security: Offering company assets as collateral can be an effective way to avoid personal guarantees. By securing the loan against business property or equipment, you shift the risk from your personal finances to the company’s assets. The downside is that if the business defaults, these assets could be seized, potentially impacting operations.
Exploring Alternative Finance Arrangements: Consider financing options that do not require personal guarantees, such as invoice financing or peer-to-peer lending. These alternatives often come with different terms and may not suit every business model, but they can provide flexibility and reduce personal risk.
Each option has pros and cons, so it’s crucial to weigh them against your business’s specific needs and financial situation. Consulting with a financial adviser can also help tailor the best strategy for your circumstances.
No, personal guarantee insurance (PGI) is not mandatory. It is an optional product that directors can purchase to protect their assets if a personal guarantee is called upon. While lenders often require personal guarantees for business loans, the decision to insure against this risk is at the discretion of the guarantor.
What types of loans can be covered by PGI?
PGI can be used to cover personal guarantees on both secured and unsecured loans. This flexibility makes it suitable for various types of business financing, including loans, overdrafts, and asset finance.
How much does personal guarantee insurance cost?
The cost of personal guarantee insurance varies depending on the size of the guarantee, the assets being used as security, the timeframes involved, and the insurer’s overall risk level. Prices vary from around £750 p.a. to £12,000 for the largest guarantees.
How does PGI differ from directors’ and officers’ insurance?
PGI and directors’ and officers’ (D&O) insurance serve different purposes. PGI protects a director’s personal assets if a business loan default triggers a personal guarantee. In contrast, D&O insurance covers legal costs and damages arising from directors’ actions or decisions made while managing the company.
How do insurers calculate premiums?
Insurers calculate PGI premiums based on several factors, including your business’s financial health, the amount of the guarantee, your creditworthiness, and the industry sector’s risk profile. A higher perceived risk typically results in higher premiums.
What are the main reasons a claim might be denied?
Claims can be denied if:
The claim is not notified within the policy period.
There was awareness of potential insolvency before the policy was taken out.
The claim involves dishonest, fraudulent, or reckless actions.
Advice from the insurance provider’s support services is not followed.
Can my company claim PGI as a business expense?
Yes, the premiums paid for PGI can typically be treated as a legitimate business expense, allowing companies to deduct the cost from their taxable income. This can make PGI more attractive by reducing the effective cost of the insurance.
Is PGI available for newly formed companies with limited trading history?
Yes, PGI can be available for newly formed companies, but availability may be limited due to the lack of trading history. Insurers might require additional information or impose higher premiums due to increased perceived risk.
Does PGI affect my credit rating?
No, taking out PGI does not directly affect your credit rating. However, if a claim is made on the policy due to a business default, this could indirectly impact your creditworthiness by affecting how lenders view your financial stability.
Can I transfer a PGI policy if I switch lenders?
Transferring a PGI policy when switching lenders depends on the policy terms set by your insurer. Some policies may allow transfers with certain conditions or adjustments in coverage terms, while others may require you to take out a new policy altogether.
What happens if I do not have PGI and my business fails?
Without PGI, if your business fails and a lender calls in your personal guarantee, you are personally liable for repaying the debt. This could put your personal assets, including savings and property, at risk.
How do I renew my PGI policy?
PGI policies are generally issued on an annual basis. To maintain coverage, you need to renew the policy each year. The renewal process usually involves reviewing your current circumstances and potentially adjusting the coverage amount and premium.
Can I buy PGI after I have already signed a personal guarantee?
Yes, you can purchase PGI after signing a personal guarantee. However, securing insurance as soon as possible is advisable to ensure coverage before any potential default occurs. Insurers may assess current financial conditions when determining coverage eligibility and premiums.
Can I transfer my PGI to another person or business?
PGI policies are usually non-transferable. This means they are specific to the individual guarantor and the business relationship. If there is a change in the business structure or in the personal guarantors, a new policy may be needed.
