If you’re a small business owner in the UK, it can be important to understand the concept of personal guarantee insurance. As a business grows and takes on new investments or risks, having some form of safety net is beneficial — especially if you’ve chosen to provide your own funds as collateral against those financial commitments.
Knowing what this type of insurance involves and how it can help protect your assets is key for any entrepreneur who wants manage their finances responsibly while still staying on top of the competition.
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Contents
- What is personal guarantee insurance?
- What can a PGI be used for?
- What does personal guarantee insurance cover?
- What are the benefits?
- When should it be used?
- How much does it cost?
- Where can I get cover?
- How long does a PGI policy last?
- FAQ
What is personal guarantee insurance?
PGI is a specialised type of business insurance that covers any potential debts or losses that may occur in the event of a personal guarantee being made. It provides valuable protection for both creditors and borrowers, offering peace of mind for those taking out loans or other forms of credit.
| What is a personal guarantee? |
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| A personal guarantee is an agreement between a lender and borrower, which could be either individuals or companies, where the borrower agrees to take on full responsibility for repaying any debts or losses that occur if the business fails. |
What types of business finance can a personal guarantee insurance policy be used for?
Personal guarantee insurance can be used for a wide range of business finance agreements, including business loans, overdrafts and other types of credit.
It is particularly useful for those businesses that may not have the necessary assets to offer as collateral against a loan, such as start-ups or businesses without property assets.
What does personal guarantee insurance cover?
PGI typically covers up to 90% of the amount of the guarantee, giving borrowers some protection in case their business defaults on a loan or other financial agreement.
It also provides payment protection for creditors should a borrower be unable to fulfil their obligations. This insurance can help lenders to protect themselves from potential losses in the event that a personal guarantee is used.
What are the benefits?
- PGI can provide valuable protection for both creditors and borrowers, offering peace of mind for those taking out loans or other forms of credit.
- It ensures that creditors will be paid in the event of a business failure, while borrowers can also benefit from protection against potential losses.
- Personal guarantee insurance can also help to increase access to credit for those who may not otherwise have been able to obtain it, as lenders are more likely to accept personal guarantees if an insurance policy is in place.
When should a business consider using this type of insurance?
If a business is looking to take out a loan or other form of credit, it’s wise to consider taking out personal guarantee insurance. This type of insurance can help to protect both the borrower and lender should the business fail to meet its financial obligations.
How much does personal guarantee insurance cost?
The cost of PGI varies depending on the amount of cover required and the type of business involved. Generally, it is priced according to the risk posed by the borrower and can range from a few hundred pounds to several thousand pounds per year.
Where can I get personal guarantee insurance?
This type of insurance is available from a range of specialist providers in the UK. Many banks and other financial institutions may also offer this type of cover, so it is worth shopping around to get the best deal.
How long does personal guarantee insurance last?
The length of the policy may vary depending on the provider, but typically it will last for a term of one to five years.
It is important that borrowers check the terms and conditions of their particular policy carefully before signing up, as some providers may require them to renew the insurance on an annual basis.
FAQ
A personal guarantee is often required by lenders when a business is unable to obtain sufficient security for the loan. It means that the guarantor agrees to take on the debt if the borrower defaults on repayment. Therefore, anyone who has provided a personal guarantee in relation to a business loan or other financial agreement could benefit from PGI.
PGI typically covers the amount of the loan that is guaranteed by an individual, up to a predetermined limit. It also provides protection against legal costs associated with enforcement of the guarantee and any legal action taken by the lender to recover losses.
Most insurers require an application form to be completed before they will consider offering coverage. This typically includes information about the business and its financial standing, as well as details of the personal guarantee and the amount being covered by the policy.
The cost of PGI can vary depending on the amount being insured, the length of the policy and any additional features it includes. You should always shop around to get a competitive quote.
If you are unable to obtain PGI, there are other options available. You may be able to provide additional security in the form of property or assets, collateralise the loan with other lenders, or look into debt restructuring and refinancing options. It is important to seek professional advice before making any decisions.
No, it is not legally required in the UK. However, if you have been asked to provide a personal guarantee, it can be beneficial to take out a policy as it offers financial protection should the worst happen.
In addition to PGI, there are other forms of loan protection available. These include credit default insurance, which covers the risk of a customer failing to make payments, and debt repayment insurance, which pays out if the business fails before it is able to repay its debts. Additionally, some lenders offer tailored products such as payment protection insurance, which cover a portion of the loan payments if the borrower is unable to do so. Again, it is important to seek professional advice before making any decisions.
It is important to remember that PGI will not protect against all risks associated with a business loan. You should still consider other forms of risk management, such as implementing effective cash flow strategies and creating contingency plans for potential financial difficulties. Additionally, you should keep an eye on the market and review your insurance policy regularly to ensure it meets your needs. This will help to ensure that you have adequate protection in place should the worst happen.