Understanding Personal Guarantees on Business Loans

Almost every small business loan requires a personal guarantee. This means you, the owner, are personally responsible for repaying the loan if your business cannot. It is a serious commitment that many business owners do not fully understand until something goes wrong.

This guide explains exactly what you are agreeing to when you sign a personal guarantee, the different types of guarantees, and how to protect yourself.

What Is a Personal Guarantee?

A personal guarantee is a legal promise that you, as an individual, will repay a business loan if your business defaults. It pierces the liability protection that LLCs and corporations normally provide.

• You are personally liable: Your personal assets are at risk, not just business assets
• Survives business closure: You owe the money even if the business shuts down
• Affects personal credit: Default impacts your personal credit score
• Can be pursued in court: Lender can sue you personally for unpaid balance

Types of Personal Guarantees

Not all personal guarantees are the same. The type matters significantly:

Unlimited vs. Limited Guarantees

The distinction between unlimited and limited guarantees is critical:

• Unlimited guarantee: You are on the hook for everything. If the business defaults on a $500K loan and liquidation only recovers $200K, you personally owe $300K plus legal fees, collection costs, and accrued interest.
• Limited guarantee: Your exposure is capped. A 50% limited guarantee on a $500K loan means your maximum personal liability is $250K, regardless of total losses.

Most traditional lenders require unlimited personal guarantees. Some online lenders and SBA-backed loans may offer limited guarantees under certain conditions.

Joint and Several vs. Several Guarantees

When multiple owners guarantee a loan:

• Joint and several: The lender can pursue any guarantor for the full amount. If your partner disappears, you are 100% responsible.
• Several (proportional): Each guarantor is only responsible for their ownership percentage. A 30% owner guarantees only 30% of the loan.

Who Has to Sign a Personal Guarantee?

Lender requirements vary, but general rules:

• SBA loans: All owners with 20%+ ownership must guarantee
• Bank term loans: Usually all owners with 20%+ ownership
• Online lenders: Typically primary owner(s), threshold varies
• MCAs: May require only the primary signer

Spouses are sometimes required to sign, particularly when:

• Community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin
• Real estate collateral: If business property has spousal interest
• Joint business ownership: If spouse is a co-owner

What Assets Are at Risk?

With a personal guarantee, the lender can pursue your personal assets:

• Bank accounts: Personal checking, savings, investment accounts
• Real estate: Your home (subject to homestead exemptions)
• Vehicles: Personal cars, boats, recreational vehicles
• Investments: Stocks, bonds, retirement accounts (some protections may apply)
• Future income: Wage garnishment is possible

Some assets have legal protections:

• Homestead exemption: Many states protect a portion of home equity
• Retirement accounts: ERISA-qualified plans often have strong protections
• Life insurance cash value: Protected in some states
• Necessary personal property: Basic furniture, clothing, tools of trade

Can You Avoid Personal Guarantees?

For most small businesses, no. Here is the reality:

• SBA loans: Personal guarantees are required by federal law for owners with 20%+ stake
• Bank loans: Nearly universal requirement for small businesses
• Online lenders: Most require guarantees; some offer unsecured options at higher rates
• MCAs: Often require guarantees despite marketing claims

Situations where you might avoid a personal guarantee:

• Substantial business assets: Enough collateral to fully secure the loan
• Strong business credit: Established business credit history (rare for small businesses)
• Large, profitable company: Usually $10M+ in revenue with strong track record
• Asset-based lending: Loan fully secured by accounts receivable or inventory

Strategies to Minimize Risk

If you cannot avoid a personal guarantee, you can manage your exposure:

• Negotiate a limited guarantee: Ask for a cap on personal liability
• Request guarantee release triggers: After certain milestones, guarantee reduces or releases
• Explore SBA loans: Government guarantee reduces lender risk, may allow better terms
• Maintain adequate insurance: Business interruption, key person, general liability
• Separate personal assets: Keep business and personal finances completely separate
• Avoid over-borrowing: Only take what you can realistically repay

What Happens If You Default?

If your business cannot repay the loan, here is the typical process:

• 1. Default notice: Lender notifies you of default (usually after 30-90 days late)
• 2. Acceleration: Full balance becomes due immediately
• 3. Demand letter: Lender demands payment from business and guarantors
• 4. Collections: Internal collection efforts or third-party collectors
• 5. Legal action: Lawsuit against business and guarantors personally
• 6. Judgment: Court orders you to pay; lien placed on assets
• 7. Asset seizure: Bank levies, wage garnishment, property liens

Personal Guarantee and Bankruptcy

Business bankruptcy does not automatically release your personal guarantee:

• Chapter 7 business bankruptcy: Business is liquidated, but your personal guarantee survives. Lender can still pursue you personally.
• Chapter 11 reorganization: If successful, may include guarantee modification, but not guaranteed.
• Personal bankruptcy: May discharge your guarantee obligation, but has severe consequences for your credit and financial life.

SBA Loan Guarantee Specifics

SBA loans have specific guarantee requirements:

• 20% ownership threshold: Anyone owning 20%+ must guarantee
• Unlimited personal guarantees: Required for all guarantors
• Spousal guarantee: May be required in community property states
• SBA guarantee to lender: The SBA guarantees the lender up to 85%, but this does not protect you
• Full recourse to borrower: If you default, lender pursues you first, then SBA pays lender, then SBA pursues you for recovery

Before You Sign: Questions to Ask

Ask these questions before signing any personal guarantee:

• Is this guarantee limited or unlimited?
• Is it joint and several or several only?
• Are there any release conditions or triggers?
• Can the guarantee be reduced over time?
• What is the cure period if I miss a payment?
• What are the lender collection policies before pursuing guarantors?
• Are there any carve-outs for specific asset types?

Working with an Attorney

For larger loans ($250K+), consider having an attorney review the guarantee:

• Review scope: Ensure you understand exactly what you are guaranteeing
• Negotiate terms: Attorney may be able to negotiate better terms
• Asset protection planning: Legal strategies to protect personal assets
• Understand enforcement: Know what happens if things go wrong

Legal fees of $500-$2,000 for guarantee review are minor compared to the potential liability of a six-figure personal guarantee.