Personal Guarantee: Definition, How It Works, and What to Know What is a personal guarantee? A personal guarantee is a legal promise by an individual to repay a business’s debt if the business cannot. It effectively makes the individual personally responsible for the obligation and gives the creditor a legal claim on the individual’s assets if the business defaults. How personal guarantees work
* Who is asked to sign: Lenders commonly require personal guarantees from business owners, executives, or anyone with significant ownership—especially for new or small businesses with limited credit history.
* What the guarantor provides: Personal credit information (often a Social Security number leading to a hard credit inquiry), personal income details, and sometimes a pledge of specific personal assets (bank accounts, real estate, vehicles).
* Underwriting impact: The lender underwrites the loan using both the business’s and the individual’s credit profiles. A personal guarantee reduces the lender’s risk, which can lead to better loan availability or improved terms.
* Enforcement: If the business defaults and the guarantor cannot pay, the creditor can pursue the guarantor’s pledged assets and, depending on the agreement, other personal assets.
Types of personal guarantees
* Limited guarantee: Liability is capped—either a fixed dollar amount or a fixed percentage of the debt. Often used when multiple principals share responsibility (e.g., each owner guarantees 25%).
* Unlimited guarantee: The guarantor is liable for the entire outstanding balance. Many government-backed programs and some private lenders require unlimited guarantees.
Small Business Administration (SBA) requirement For SBA loans, anyone owning 20% or more of the business must provide an unconditional personal guarantee. SBA-backed loans are issued by lenders but backed by the SBA, and this guarantee requirement is standard. Risks and considerations
* Personal financial exposure: A personal guarantee puts personal assets at risk. If the business fails, the guarantor may face collection actions, asset seizure, or reduced creditworthiness.
* Potential benefits: Providing a guarantee can make borrowing possible or secure more favorable loan terms. Business losses may also affect the guarantor’s tax situation in certain circumstances.
* Wording matters: Guarantee agreements can include phrases like “jointly and severally liable,” which allow creditors to pursue any one guarantor for the full debt. Read contract language carefully.
Practical steps to manage risk
* Negotiate limits: Seek a capped (limited) guarantee, a sunset clause that removes the guarantee after a period, or a guarantee that applies only to specific collateral.
* Request a release: Negotiate a guarantor release tied to performance milestones (e.g., sustained revenue, time elapsed, or refinancing).
* Use corporate protections: Maintain proper corporate formalities and keep business and personal finances separate to support limited liability defenses.
* Obtain legal review: Have an attorney review guarantee language and advise on protections, indemnities, or alternative financing options.
* Consider insurance and indemnities: Explore credit or business interruption insurance and contractual indemnities from partners where appropriate.
Key takeaways
* Personal guarantees are common for new or small businesses and reduce lender risk by making owners personally liable for business debt.
* Guarantees can be limited or unlimited; unlimited guarantees carry greater personal exposure.
* SBA loans require unconditional guarantees from owners with 20%+ interest.
* Always review guarantee terms carefully and seek negotiation or legal advice to limit personal risk.
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