What Is A Personal Guarantee?

Most lenders require a personal guarantee when approving small business financing. While it’s a common requirement, many business owners don’t fully understand what they’re agreeing to or the risks involved.

This guide explains what a personal guarantee is, how it works, and when signing one makes sense for your business.

What Is A Personal Guarantee?

A personal guarantee is a legal agreement that makes you personally responsible for repaying a business loan if your business can’t. This means the lender can pursue your personal assets if the loan defaults.

What Is A Guarantor?

A guarantor is an individual who signs a personal guarantee and agrees to repay a business loan if the business defaults. Lenders typically require guarantors to own at least 20% of the business.

While business owners are the most common guarantors, lenders may also require loan cosigners — and in some cases, spouses — to sign the guarantee.

How Does A Personal Guarantee Work?

A personal guarantee is commonly required when you apply for financing from banks, credit unions, online lenders, and many business credit cards. Even loans marketed as “unsecured” often still require a personal guarantee.

While a personal guarantee puts your personal assets at risk, it can improve your approval odds and loan terms:

• Helps you qualify when your business lacks collateral
• May result in lower interest rates

That said, personal guarantees give lenders significant leverage if your business defaults. The good news is that not all guarantees are the same—some offer more protection than others.

Why Lenders Require Personal Guarantees On Business Loans

Personal guarantees reduce risk for lenders by increasing the likelihood that a loan will be repaid. By signing one, you show personal commitment to the debt and give the lender legal recourse if your business defaults.

Because guarantees lower lender risk, they can also lead to better loan terms, including lower interest rates and fewer fees compared to fully unsecured financing.

Types Of Personal Guarantees

Personal guarantees generally fall into two categories: unlimited and limited. The difference determines how much personal risk you take on if your business defaults.

Unlimited Personal Guarantee

An unlimited personal guarantee makes you fully responsible for any unpaid loan balance, including legal fees and collection costs. For example, if you owe $40,000 and the lender incurs $8,000 in legal expenses, you’re on the hook for the full $48,000.

This type of guarantee is most common for single-owner businesses and offers little personal protection. In some cases, borrowers may be able to negotiate limits before signing.

Limited Personal Guarantee

Limited guarantees are typically used when multiple owners sign for a loan. There are two common forms:

• Joint and several guarantee: Each guarantor is responsible for the full loan amount, regardless of ownership percentage.
• Several guarantee: Each guarantor is responsible only for a predetermined portion of the debt, usually based on ownership share.

Several guarantees are generally preferable for partnerships, as they clearly define each person’s financial responsibility upfront.

What Is Required For A Personal Guarantee?

Legally, a personal guarantee requires only your signature. However, before signing, you should fully understand the terms and consider negotiating limits or protections.

Reviewing the agreement with an attorney can help you assess the risk and avoid unfavorable terms.

Personal Guarantee VS Business Collateral

Personal guarantees and business collateral both reduce lender risk, but they work in different ways and expose different assets.

Business collateral secures a loan with specific business assets, such as equipment or real estate, or with a blanket lien covering all business assets. If you default, the lender can seize those business assets, but not your personal assets unless you also signed a personal guarantee.

A personal guarantee, by contrast, gives the lender the right to pursue your personal assets if the business fails to repay the loan. Many loans secured by blanket liens also require a personal guarantee, increasing lender protection.

Another key difference is visibility. Loans secured by business collateral trigger a UCC filing, which alerts other creditors to the lien and can limit your ability to obtain additional financing until the lien is released. Personal guarantees do not trigger a UCC filing and won’t appear on your credit report unless you default.

How Personal Guarantees Can Affect Your Business

If you sign a personal guarantee and repay the loan as agreed, nothing happens. The risk comes into play only if your business defaults—something no borrower plans for, but sometimes can’t avoid.

If a default occurs, one of two things typically happens.

Scenario 1: The Lender Enforces The Guarantee

If a lender chooses to enforce the personal guarantee, they’ll consider how much you owe and whether pursuing repayment is worthwhile.

If the lender obtains a court judgment, they may be able to:

• Seize business assets, such as cash reserves, receivables, or equipment
• Seize certain personal assets, such as vehicles or valuables
• Garnish wages

In most states, lenders cannot seize your primary residence or retirement accounts, even with a judgment.

Scenario 2: The Lender Does Not Enforce The Guarantee

In some cases, lenders decide not to pursue legal action, often because the balance is small or recovery is unlikely.

However, even if the guarantee isn’t enforced:

• The default may damage your personal and business credit
• The debt may be sent to collections
• Any existing blanket lien can still be enforced, allowing the lender to seize business assets

Should You Sign A Personal Guarantee?

Most business lenders require a personal guarantee, and loans without one often come with higher rates or fees.

That said, you should review the terms carefully and negotiate where possible. Some lenders may allow you to limit liability, exclude a spouse or cosigner, or add protections once part of the loan is repaid.

If the terms don’t work for you, it’s okay to walk away. Alternatives include certain business credit cards and select unsecured loans that don’t require a personal guarantee.