When a business applies for financing, lenders want assurance that the loan will be
repaid. One of the most common tools lenders use to reduce their risk is a
personal guarantee (PG). This agreement holds the business owner
personally responsible if the business cannot repay the loan.
- Lenders require personal guarantees to reduce financial risk.
- A personal guarantee allows lenders to pursue the borrower personally if the business defaults.
- Limited and unlimited guarantees determine how much liability the owner carries.
- Understanding the terms before signing helps protect your personal and business finances.
What Is a Personal Guarantee?
A personal guarantee is a legal promise that the business owner will personally repay
the loan if the business cannot. It is similar to co-signing a loan—if the company fails
to pay, the individual must cover the obligation.
With a PG, lenders gain access to the borrower's personal assets and income as a backup
repayment source.
Why Lenders Require Personal Guarantees
Business loans carry inherent risk, especially when dealing with newer companies or
those without a strong financial track record. A personal guarantee reduces the lender’s
risk by ensuring there is an additional path to repayment.
Lenders often require a personal guarantee when:
- The business is new and lacks an established financial history
- The company does not have sufficient collateral
- The business has limited credit or weak credit scores
- Revenue or cash flow is inconsistent
By signing a PG, the business owner shows personal commitment and provides reassurance
that they are invested in the business’s success.
Types of Personal Guarantees
Limited Personal Guarantee
A limited guarantee caps the owner’s liability at a specific amount or percentage of
the loan. When multiple business owners exist, each may take responsibility for only
their proportional share.
Unlimited Personal Guarantee
This guarantee holds the owner responsible for the full loan amount, plus interest,
collection costs, and fees. Most traditional business loans and government-backed loans
require unlimited guarantees.
Loan Types That Commonly Require PGs
- Traditional bank term loans
- Business credit cards
- Lines of credit
- Government-backed small business loans
- Secured business loans (even if collateral is provided)
Risks of Signing a Personal Guarantee
- Your personal assets—such as your home or savings—may be at risk if the business defaults.
- Defaults may appear on your personal credit report.
- Spouses may be required to sign the guarantee, expanding financial liability.
How to Avoid Personal Guarantees
Some strategies may reduce the likelihood of needing a PG:
- Strengthen your business credit profile
- Offer business assets as collateral
- Provide a larger down payment when applicable
- Operate as a formal business entity instead of a sole proprietorship
Financing Options That May Not Require PGs
Some alternative funding types typically avoid personal guarantees:
- Merchant cash advances (based on future sales)
- Invoice factoring
- Revenue-based financing
- Crowdfunding
- Certain corporate credit products for established companies
What to Do Before Signing a Personal Guarantee
- Review your business’s cash flow to ensure the loan is affordable
- Understand the loan requirements and lender expectations
- Assess which personal assets may be at risk
- Discuss obligations with business partners
- Read the loan agreement carefully
- Negotiate terms such as liability limits or expiration dates
- Consult with a business attorney for legal guidance
Summary
Personal guarantees are a standard part of business lending, especially for smaller or
newer businesses without strong credit or collateral. While they increase personal
liability, they also open the door to financing that would otherwise be unavailable.
Understanding the types of guarantees, potential risks, and ways to protect yourself
can help you make informed borrowing decisions.