What does it mean to personally guarantee a loan?
The term personal guarantee refers to a person’s legal promise to repay loans issued to a company for which they are an executive or partner. Providing a personal guarantee means that the individual assumes personal responsibility for the balance if the company is unable to repay the debt. A personal guarantee is almost unsecured by definition, which means that it is an amount that is not tied to a specific asset such as a residence. But by providing a guarantee, you’re putting yourself — and your assets — in the hook by acting as a co-signer of the loan.
If your business dissolves, you are responsible for repaying. The creditors will follow up on you if your company does not repay the loan. A personal guarantee is a legal clause designed to protect the lender in a situation where the company cannot repay its debt. As a business owner, signing a personal guarantee could put you and your family’s financial future at risk.
Before you sign this dotted line, make sure you fully understand what a personal guarantee is and what types of guarantees you can most often find in your business loan agreement. If you’ve read it along with your lawyer and you both decide it sounds fair and you have a plan to repay the loan, a personal guarantee can be a viable option for your business. By agreeing to a personal guarantee, the business loan holder agrees to be 100 percent personally responsible for repaying the entire loan amount, in addition to any collection, legal or other costs associated with the loan. A personal guarantee is a provision that a lender includes in a business loan agreement that requires owners to be personally responsible for their company’s debts in the event of default.
When filling in the form, you will come across several questions about whether and by how much you want to guarantee the loan personally. So if your business fails and your business partner then disappears or doesn’t have sufficient personal assets to cover their portion of the loan, your lender can come after you for both your share of the guarantee and the part that is not paid by your partners. A personal guarantee is a type of unsecured loan agreementCommercial loan agreementA commercial loan agreement refers to an agreement between a borrower and a lender when the loan is for business purposes. You will also be asked by the bank to fill out a standard loan form on which the expectation of a personal guarantee is increased.
Although this is a common provision in the fine print of a business loan, a personal guarantee can put your family’s finances at risk. On the other hand, limited personal guarantees set a dollar limit, which can be recovered from you as a borrower should you default on your loan. If a secured business loan is not an option, ask business partners or other owners to also sign personal guarantee credit agreements so that everyone is liable for their pro rata share. Note that if you personally guarantee a small business loan and the company is unable to make regular payments on time, it is likely to have a negative impact on your personal credit rating as well.
When you apply for a small business loan, you may be asked to provide a personal guarantee for the loan in whole or in part. As you review your business loan agreement, you may be wondering whether a personal guarantee is worth the risk. Secured loans are considered secured loans, as opposed to loans with personal guarantees or lump-sum real estate liens that are considered unsecured. Many small business owners are surprised when a lender asks for a personal guarantee when applying for a business loan.