What is a Personal Guarantee?
Understanding personal guarantees in business lending, when they are required, and what they mean for your personal financial liability.
A personal guarantee is a legal commitment that makes you personally responsible for repaying a business loan if your company cannot. When you sign a personal guarantee, you pledge your personal assets as a backstop for the business debt.
Why Lenders Require Personal Guarantees
Personal guarantees protect lenders by adding a layer of security beyond the business itself. If your business defaults, the lender can pursue your personal assets, including bank accounts, real estate, and investments.
Most small business loans require personal guarantees because the business entity alone may not have sufficient assets or credit history. SBA loans require personal guarantees from anyone owning 20% or more of the business.
Types of Personal Guarantees
There are two main types:
- Unlimited personal guarantee: You are liable for the full loan amount plus legal costs and interest. This is the most common type.
- Limited personal guarantee: Your liability is capped at a specific dollar amount or percentage. Harder to negotiate but offers some protection.
Example Scenario
You take a $200,000 SBA loan with an unlimited personal guarantee. Your business struggles and defaults with $150,000 remaining. The lender can seize business assets first, but if those only cover $50,000, the lender can come after you personally for the remaining $100,000.
Joint Guarantees
If multiple owners guarantee a loan, each may be liable for the full amount (joint and several liability). The lender can pursue whoever is easiest to collect from, regardless of ownership percentage.
What Assets Are at Risk?
Personal guarantees can put these assets at risk:
- Personal bank and investment accounts
- Real estate (including your home in many states)
- Vehicles and personal property
- Future wages (through garnishment)
Can You Avoid Personal Guarantees?
Most small business financing requires personal guarantees. However, some options exist:
Large, established businesses with strong balance sheets may negotiate unsecured corporate debt. Invoice factoring and some equipment loans may not require personal guarantees if the collateral covers the risk. Building substantial business credit over time can reduce personal guarantee requirements.
For most small businesses, personal guarantees are a fact of life. The key is understanding the risk and ensuring you have confidence in your ability to repay.
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Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.