Personal guarantee
A personal guarantee is a promise by a business owner to repay a business debt from personal assets if the business cannot.
A personal guarantee is a contract clause that makes you personally responsible for a business debt. If the company stops paying, the lender can pursue you as an individual, which may include your personal bank accounts, savings, or other assets depending on the terms. Most small business financing carries a personal guarantee because new and small companies often lack a long credit history of their own, so the lender wants a person standing behind the obligation. Guarantees can be unlimited, covering the full balance, or limited to a set dollar amount or a percentage of the loan.
Because a guarantee ties your personal credit and assets to the loan, it raises the stakes if the business hits trouble, but it also tends to improve your odds of approval and can lower your rate, since the lender takes on less risk. If you want to reduce exposure, you can ask whether a limited guarantee is available, whether the guarantee can be released after a track record of on time payments, or whether stronger business collateral could offset the need for as broad a guarantee. Read the clause closely and have an attorney review anything you do not understand before you sign.
Common questions
Does a personal guarantee affect my personal credit?
It can. If the business defaults and the lender reports the debt, a guaranteed loan may appear on or affect your personal credit, and the lender can collect from you directly.
Can a personal guarantee be removed later?
Sometimes. Some lenders will release or reduce a guarantee after the business builds a payment history or its own credit, so it is worth asking before you sign and again once the business is established.
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