Should You Sign A Personal Guarantee For A Business Loan? – Forbes Advisor

Should You Sign A Personal Guarantee For A Business Loan? – Forbes Advisor

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When you sign a personal guarantee for a business loan, you’ll be personally responsible for paying back the debt if your business fails to repay. This means putting your personal assets at risk to secure financing for your business.

While there are some potential benefits of signing a personal guarantee—more favorable loan terms or better approval odds—borrowers should not enter this type of arrangement lightly. Before agreeing to sign a personal guarantee, compare the available options and determine whether the loan offer makes sense for you and your business.

Loan amounts

$5,000 to $250,000

Loan amounts

$6,000 to $250,000

Time in business

6 months

Loan amounts

$5,000 to $500,000

Time in business

6 months

What Is a Personal Guarantee on a Business Loan?

A personal guarantee is a binding contract stating that the individual signing it is personally responsible for repaying the loan in case of default. It gives lenders extra security when extending small business loans and allows them to pursue legal action against the guarantor if the business doesn’t repay the loan. Lenders require personal guarantees for a range of business debt, including term loans, lines of credit and credit cards.

Under a personal guarantee, the guarantor’s assets may be used as collateral to secure repayment of the loan. This means if your business defaults on its loan, your lender can come after your personal assets—such as bank accounts, cars or real estate—before it can access your business’s assets.

While lenders often require personal guarantees for business loans, this type of loan agreement can also help business owners qualify for financing. A personal guarantee reduces the amount of risk absorbed by the lender, so qualification requirements may be more flexible than for loans that don’t require a guarantee.

How Do Personal Guarantees Work on Business Loans?

When signing a personal guarantee, a borrower becomes obligated to repay the business loan if their business cannot make its payments. The lender is then entitled to seek repayment from the guarantor should it become necessary. Depending on the size and terms of the loan, lenders may require more than one guarantor.

Some lenders require personal guarantees even if they have adequate collateral for a business loan. Lenders also may require business owners to personally guarantee otherwise unsecured business loans. This additional security helps protect the lender’s interests if the borrower defaults on their obligation.

These are the two main types of personal guarantees:

  • Unlimited personal guarantees. These guarantees require a guarantor to accept full liability for the loan. This means the guarantor is responsible for repaying the entire loan amount. So, if a business takes out a $200,000 loan, the business owner guarantor must repay the entire outstanding loan amount if the business cannot.
  • Limited personal guarantees. Limited personal guarantees restrict each guarantor’s exposure and responsibility to a certain dollar amount or percentage of the total loan debt. This may be the case if a loan is guaranteed by four owners of a business. Depending on the loan agreement, guarantors may face “joint and several liability,” meaning the lender can seek repayment from one, some or all of the loan guarantors. In the case of the $200,000 loan, each guarantor may be responsible for a quarter of the loan balance or the entire balance.

When Do Lenders Require a Personal Guarantee on Business Loans?

The majority of business lenders require personal guarantees, but the exact requirements vary by lender. Choose a lender that matches your business’s borrowing needs and aligns with your ability to repay the loan if your business defaults. Here’s how some common business lenders treat personal guarantees:

  • Government lenders. Small Business Administration (SBA) loans require business owners who own 20% or more of the company to provide an unlimited personal guarantee.
  • Traditional banks. Traditional banks usually require some form of personal guarantee for business loans. However, they may waive the requirement if the borrower has a strong credit score, collateral sufficient for a secured loan and a good history of managing their finances.
  • Online lenders. Many online lenders require personal guarantees for business loans. Read the loan agreement carefully to determine the type of guarantee.

Do All Business Loans Require a Personal Guarantee?

Most lenders require business owners to personally guarantee their business loans. But some lenders may be willing to waive the requirement if the business makes a large deposit, provides a letter of credit or puts up sufficient collateral that meets the lender’s standards.

Make sure you understand the details of your loan agreement before signing any documents and be aware of the potential risks involved in personally guaranteeing a business loan. Take steps to fully understand the implications of signing a personal guarantee and ensure you can personally repay a loan before committing to financing for your business.

Can You Get a Business Loan Without a Personal Guarantee?

It’s possible to get a business loan without a personal guarantee, but it may not be an option for all borrowers—or from all lenders. If you do not provide a personal guarantee, the lender will not have recourse against you in case of default. Lenders make up for this increased risk by imposing more restrictive financial requirements and charging higher interest rates.

What To Consider Before Signing a Personal Guarantee on a Business Loan

Whether you should sign a personal guarantee for a business loan depends on your specific situation, but there are a few key points to consider:

  • Your qualifications and approval odds. Getting a business loan is easier if you’re willing to sign a personal guarantee. However, well-qualified business owners may qualify for competitive interest rates without guaranteeing the loan. Evaluate your approval odds based on each lender’s requirements to see if you might be eligible without a guarantee.
  • The business’s need for financing. Assess the risk of signing a personal guarantee against the potential benefit of getting the loan. Do your due diligence to ensure the loan is necessary for business growth and that you’re not borrowing more than necessary.
  • The availability of business collateral. Businesses that own substantial assets like equipment or real estate may be able to avoid a personal guarantee by pledging some of their valuable collateral. Depending on the circumstances, a secured loan may be favorable to signing a personal guarantee.
  • Your business’s ability to repay the loan. Carefully consider your business’s cash flow and ability to meet repayment obligations before taking out a loan. Make sure the business has enough funds coming in to cover the loan payments.
  • The lender’s requirements. Understand what a lender requires from each guarantor and determine whether the personal guarantee is reasonable for your situation.
  • Your own ability to repay. Even if you think your business can handle the debt, make sure you can personally cover the loan amount in case of default. Consider your savings and other assets you can use to pay off a debt if necessary. Also consider whether you can replace assets put at risk by a personal guarantee.

If you decide to sign a personal guarantee for a business loan, make sure you understand the terms of the agreement and how it can affect your financial well-being. Research and compare different lenders and products before signing loan documents so you can secure the best deal possible for your business.

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About Caroline Vega 228 Articles
Caroline Vega combines over a decade of digital strategy expertise with a deep passion for journalism, originating from her academic roots at Louisiana State University. As an editor based in New Orleans, she directs the editorial narrative at Commercial Lending News, where she crafts compelling content on commercial lending. Her unique approach weaves her background in finance and digital marketing into stories that not only inform but also drive industry conversations forward.