Personal guarantee insurance

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Page written by Chris Godfrey. Last reviewed on November 6, 2024. Next review due April 1, 2025.

Almost every Canadian business will need to borrow money at some point in its life. Unfortunately, unless the business has large assets, the lender will usually look to the business owner or directors to provide security for the funds. This means giving a personal guarantee and putting the owner’s or the director’s personal assets at risk. Without this kind of collateral, many lenders won’t make the loan.

Personal guarantee insurance (PGI) is designed to reduce risk for business owners: The policy covers a large percentage of the loan. This delivers the double benefit of lowering financial exposure for the guarantors and making lenders more comfortable by providing an extra financial backstop in case things should go wrong.

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What is personal guarantee insurance?

Personal guarantee insurance is a form of business insurance designed to protect business owners who must provide a personal guarantee to the lender when their company takes out a business loan.

When a business owner or director personally guarantees a loan, they are offering their private assets as security against the debt. Typically, this will include their home. If the business defaults and cannot repay the debt, the individual is personally responsible for the amount guaranteed and the bank can seize and sell their assets to recover the money. Personal guarantee insurance can cover a portion of this liability, reducing risk to the business owner’s personal wealth.

PGI at a glance

Coverage	PGI covers a percentage of the personal guarantee, which can range from 60% to 80% or even more, depending on the specific policy terms. If the business defaults, the insurance will pay back this portion of the debt, leaving the guarantor responsible for the balance.
Flexibility	Some PGI policies might allow for increases in coverage (the percentage the policy will pay out) as the business continues to repay its loan and reduce its debt.
Cost	The cost of PGI will vary depending on the sum insured, the nature and financial health of the business, and the credit rating of the guarantor.
Making a claim	PGI is not a simple way to walk away from debt. Certain conditions must be met before a claim is paid. For example, the policy might demand that the business must be declared insolvent before a claim can be considered.
Benefit to lenders	PGI is primarily taken out to protect the business owners, but it can also provide some assurance to lenders, as it adds extra security to the loan.
Limitations and exclusions	No insurance policy covers everything, PGI will have certain exclusions and limitations. It is important to read your policy carefully and to understand what’s covered and what’s not.

Advantages of PGI

Personal guarantee insurance can deliver significant advantages to both individuals and businesses:

Protection of personal assets

Reduce the financial risks associated with personal guarantees – let the insurance do the heavy lifting.

Cost-effective protection

The cost of PGI is typically far lower than the potential costs of defaulting on a personal guarantee.

Customised coverage

Business owners can tailor the policy to match their individual needs and business circumstances – such as arranging coverage for new or existing personal guarantees, multiple personal guarantees, or one or more guarantors. This can protect the business owner from the risk of heavy personal loss across their entire loan portfolio.

Easy application process

Most PGI can be applied for online with simple forms to complete. This promotes fast turnaround times for quotes and policies.

High level of coverage

Cover up to 80% or more of the value of the personal guarantee

Why would a business owner need personal guarantee insurance?

Ten reasons why personal guarantee insurance makes sense for business owners:

Safeguards personal assets:
The most important benefit of PGI is that it can protect personal assets – the business owner’s home and/or savings have less risk of being seized by a lender should their business default on a loan.
Delivers peace of mind:
Knowing that a large portion of the potential debt is covered by PGI can reduce the stress and worry associated with the potential of a business loan default.
Promotes business growth:
The risk associated with personal guarantees and the potential to lose their home and savings can put many business owners off the idea of taking on debt to grow their business. However, PGI can make those kind of decisions easier, allowing business owners to take the calculated risks that can help the business grow.
Increases borrowing power:
Lenders may be more willing to grant a loan or offer better terms when they know that a large portion of the debt is backed by PGI, in addition to the personal guarantee.
Reduces the threat of personal bankruptcy:
If the worst happens and the business enters insolvency, having PGI could make the difference between personal financial survival and personal bankruptcy for the guarantor.
Offers flexible coverage:
Some PGI policies offer flexible coverage, where the sum insured can increase as the business repays its loan and reduces its total outstanding debt.
Assures stakeholders:
PGI can instil confidence in investors, lenders, and even key employees, because they know there’s a safety net in place.
Manages risk:
Most business owners are used to managing risk, but PGI provides an additional layer of security. Even if the business faces unexpected challenges, the owner’s personal assets have a strong measure of protection.
Allows for more than one guarantor:
In businesses with multiple partners or directors, if each has provided a personal guarantee, PGI can be taken out by each guarantor, ensuring that all are similarly protected.
Negotiation leverage:
If the business faces financial difficulties, having PGI in place may provide leverage when negotiating with lenders. Because a portion of the debt is fully covered, they may agree to more favourable restructuring terms.

What percentage does personal guarantee insurance cover?

Personal guarantee insurance will typically protect 60% to 80% of the loan value. However, depending on the type of loan and the financial strength of the business, some insurers may offer higher cover.

Who pays the insurance premium?

Personal guarantee insurance is applied to business loans taken out by the company. The organisation is therefore responsible for paying the insurance premiums, not the individual guarantors.

What is the average cost of personal guarantee insurance?

The cost of PGI is determined by a range of variable factors – the sum insured, the term of the loan, the credit ratings of the guarantors, and the financial health of the business.

How Swoop help

PGI isn’t available in Canada right noww but there are other types of insurance that can provide an equal or superior form of protection for your business.

Speak with Swoop’s insurance experts to understand your options and protect your business and yourself from all eventualities.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

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