Personal Guarantees for Business Loans: What to Know Before Signing

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Key takeaways
- A personal guarantee requires you to repay your business loan from your personal assets if your business defaults.
- A personal guarantee can be a provision of your business loan agreement or included as an addendum.
- Most lenders require a personal guarantee. In some cases, you may be able to avoid one with a large deposit or other collateral.
How much do you need?
What is a personal guarantee on a business loan?
- Unlimited personal guarantees. These generally mean that an individual guarantor is responsible for paying everything owed to the lender until the loan is paid in full. For example, if the business borrows $100,000, the borrower with an unlimited personal guarantee is personally responsible for repaying the debt if the business can’t.
- Limited personal guarantees. These typically mean the guarantor shares responsibility with other people for repaying the debt if the business defaults. For example, if a business borrows $100,000 and there are three owners who each own 33% of the business, the owners may each be personally responsible for repaying up to a third of the outstanding balance if the business can’t repay the debt. However, limited personal guarantees may include joint and several liability, which means the lender can demand payment for all of the debt from one, some or all of the guarantors
.
Do all business loans require a personal guarantee?
- Chase.
- PNC Bank.
Can I get a business loan with no personal guarantee?
Should I sign a personal guarantee on a business loan?
- Are you confident your business will be able to repay the loan and abide by the other conditions of the loan? Review your business plan and financial statements to determine if the business can reliably make the payments. Even if the math looks good, remember that if the business does make the payments but violates the other conditions of the loan, the lender could still consider the business in default.
- Do you understand the terms of the personal guarantee? Be sure you know how much you could be liable for, how long you’d have to pay and whether the lender will come after certain assets you own first.
- Do you have the funds to repay the loan if the business defaults? Once you know the circumstances under which you’d be personally on the hook for the loan, ask yourself whether you could sustain a drop in your credit score and financial security if that day actually comes.
Article sources
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PwC. U.S. Financing Guide, Overview of guarantee and joint and several liability. Accessed Jun 14, 2022.1. -
U.S. Small Business Administration. Office of Financial Assistance. Accessed Jun 14, 2022.2. -
Federal Reserve. 2020 Report on Employer Firms Small Business Credit Survey. Accessed Jun 14, 2022.3. -
National Agricultural Law Center. Financing the Farm. Accessed Jun 14, 2022.4.