Understanding personal guarantees helps you make informed decisions about business financing.
A personal guarantee is a legal agreement where you (personally) promise to repay a business loan if your business can't. It makes you personally liable for the debt, meaning lenders can go after your personal assets (home, savings, investments) if the business defaults. Most business loans require personal guarantees, especially for businesses under 2 years or loans over $50k. It's standard practice and helps you access capital with better terms.
When you sign a personal guarantee, you're essentially co-signing the loan:
As part of the loan agreement, you sign a personal guarantee document making you personally responsible for repayment.
As long as your business makes payments on time, the personal guarantee doesn't come into play. Everything works normally.
If the business can't repay, the lender can pursue you personally for the remaining balance, including seizing personal assets.
Most business loans require personal guarantees, especially:
You're responsible for the full loan amount plus fees and interest. Most common type. All your personal assets are at risk.
Your liability is capped at a specific amount (e.g., 25% of loan). Less common, usually for larger businesses or multiple guarantors.
Multiple owners guarantee the loan. Lender can pursue any guarantor for the full amount, not just their share. Common for partnerships and LLCs.
If you default and the lender enforces the guarantee, they can pursue:
For larger loans or established businesses, negotiate a cap on your personal liability (e.g., 50% of loan amount).
Strong collateral (equipment, real estate) may reduce guarantee requirements or allow for limited guarantees.
Established businesses (2+ years) with strong business credit may qualify for loans with reduced or no personal guarantees. Learn about building business credit.
Loans secured by assets (equipment, receivables) may have less stringent guarantee requirements. Learn about asset-based lending.
It's difficult for most small businesses. Established companies (5+ years) with strong business credit and significant assets may qualify for loans without guarantees, but they're rare. Most lenders require them as standard practice.
The guarantee itself doesn't appear on your personal credit report. However, if the business defaults and you don't pay, the lender can report the default to your personal credit, damaging your score.
A co-signer also signs a personal guarantee and is equally liable. The lender can pursue either of you for the full amount. Both your credit scores are at risk.
Once signed, it's legally binding. You can't unilaterally cancel it. Some lenders may release guarantees after a period of successful payments or if business credit improves significantly, but this is rare and requires negotiation.
Understand all qualification requirements including personal guarantees.
Build business credit to potentially reduce personal guarantee requirements.
Asset-based loans may have less stringent guarantee requirements.
Compare loan options and their guarantee requirements.
Our team explains all loan terms, including personal guarantees, so you know exactly what you're signing.
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