Page written by Chris Godfrey. Last reviewed on August 7, 2024. Next review due October 1, 2025.
Almost every US 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.
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.
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. |
Personal guarantee insurance can deliver significant advantages to both individuals and businesses:
Reduce the financial risks associated with personal guarantees – let the insurance do the heavy lifting.
The cost of PGI is typically far lower than the potential costs of defaulting on a personal guarantee.
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.
Most PGI can be applied for online with simple forms to complete. This promotes fast turnaround times for quotes and policies.
Cover up to 80% or more of the value of the personal guarantee
Ten reasons why personal guarantee insurance makes sense for business owners:
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.
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.
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.
PGI isn’t available in the US, 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 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 Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.
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