Why It’s Time to Rethink Personal Guarantees in SME Lending

Personal guarantees  have long been a fixture in SME lending, providing lenders with an added layer of security to offset the inherent risks of financing small and growing businesses.

For many first-time founders, the very notion of a personal guarantee can seem absurd. After all, aren’t limited companies meant to offer limited liability? In theory, yes. But in practice, especially for early-stage businesses with little or no track record, the perceived risk of the business is closely tied to the profile of the owner(s). For most lenders, the two are therefore treated as one and the same.

Historically, lenders were more selective in their request for personal guarantees. They tended to be required in higher-risk scenarios or where businesses lacked a strong operating history, typically fewer than three years of trading and under £200k in annual recurring revenue. For more established SMEs, personal guarantees were less frequent and rarely a precondition for accessing mainstream lending.

How Covid Changed the Game

The COVID-19 pandemic marked a turning point. Government-backed schemes like the Bounce Back Loan Scheme and the Growth Guarantee Loan Scheme temporarily removed the need for personal guarantees altogether. The state absorbed much of the risk, enabling SMEs to access funding quickly and without personal liability.

With that support now phased out, lenders have grown increasingly cautious - a shift driven by inflationary pressures, rising interest rates, and tighter credit conditions. Personal guarantees have evolved from a last resort into a standard requirement.

Lenders are increasingly expecting directors or owners to be homeowners as a minimum requirement - often with formal charges placed over personal property. As a result, homeownership has quietly become a prerequisite, influencing not just loan approval but also the quality of rates and terms on offer.

The implications for accessibility and fairness are significant, especially for capable entrepreneurs who are not yet on the property ladder.

The Bigger Picture: SMEs and the Economy

SMEs are the backbone of the UK economy, accounting for 99.8% of businesses and contributing £2.8 trillion in economic output. As of October 2024, the UK was home to more than 5.48 million small and medium-sized enterprises, compared to just 8,250 large businesses. Collectively, these SMEs employed over 16.7 million people. Their continued growth and resilience matter, not just for founders and employees, but for the country as a whole.

Capital remains stubbornly out of reach for many, with 30% of businesses citing credit access as their main growth constraint - and the consequences are significant. With nearly half of new businesses failing within five years the stakes are high, for borrowers and lenders alike.

Time to Rebalance Risk

What’s needed now is a smarter, more proportionate approach to risk.

Advances in technology, from open banking to behavioural analytics and real-time affordability checks, give lenders far greater visibility into a business’s true performance and potential than ever before. When properly used, these tools enable very sophisticated risk assessment, reducing the need to default to personal guarantees as a blunt instrument. Progressive lenders such as Funding Circle and iwoca have demonstrated the viability of this model.

Tiered or contextual personal guarantees, tailored to the maturity of the business or the specific use of funds, offer a more balanced and transparent model. Clearer disclosure standards would also help founders understand the full implications of what they’re signing, building greater trust across the ecosystem.

Where Do We Go From Here?

Rethinking personal guarantees isn’t about undermining lenders’ ability to manage risk. It’s about ensuring that risk is shared fairly, and that access to finance isn’t determined by whether a founder happens to own a home.

If we want the UK’s entrepreneurial economy to thrive, we need lending practices that reflect the modern realities of small business ownership. That means embracing better data, more intelligent underwriting, and a willingness to revisit long-held assumptions.

I’d love to hear your thoughts. What’s been your experience with personal guarantees?