Personal Guarantees On Business Loans: What To Know

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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If you’re approved for a small business loan, you’ll have to sign a lengthy loan agreement before receiving the proceeds. While reviewing the document, you may notice that the lender requires a personal guarantee to execute the contract, but what does this mean for your personal finances? 

Keep reading to learn more about what a personal guarantee entails, how it could impact your finances, and if you should explore financing alternatives that don’t require a personal guarantee to receive funding. 

Quick and Easy Small Business Loans

What is a Personal Guarantee?

As the name suggests, a personal guarantee provides assurance to the lender that you’ll repay any business debt using personal assets if the business is unable to repay what’s owed. Basically, this means you’ll be personally liable for the debt, or the business lender has the right to take legal action and go after your assets to recover what’s owed. 

Business loans often require personal guarantees to offset the risk of loss. Even if your business is financially stable and you have a solid credit history, there’s no way to know if it will continue to thrive over time. The lender still needs to get paid, hence the need for a personal guarantee to ensure the amount you borrow is repaid in full.

Limited vs. Unlimited Personal Guarantee

There are two types of personal guarantees to be aware of: 

  • Limited personal guarantee: A limit on the amount the lender can collect from the borrower if they default on the loan agreement. Limited personal guarantees are common in agreements between several business partners. 
  • Unlimited personal guarantee: This type of guarantee allows the lender to recover the entire outstanding loan amount and any legal fees incurred during the collection process.

An Example of a Personal Guarantee

To illustrate how an unlimited personal guarantee works, assume you take out a $100,000 business loan. After a few years of payments, you still owe $48,000 to the lender, but unforeseen circumstances limit your ability to repay the remainder of the funds. The lender is unable to reach a payment arrangement with you, so they take you to court and win a judgment against you. If they incur legal fees of $6,000, this amount is added to your remaining balance, and you’ll owe a total of $54,000.

The lender can seize this amount from your business or personal assets to settle the outstanding loan balance.

Do Personal Guarantees on Business Loans Affect Your Personal Finances?

As mentioned above, personal guarantees on business loans only affect your personal finances if you default on the loan. The lender can seize your personal assets to recoup what’s owed, but the amount they’re entitled to depends on whether you have an unlimited or limited personal guarantee. 

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What to Look Out for with Personal Guarantees on Business Loans

Before signing on the dotted line of a business loan agreement, be sure to look out for the following with regard to personal guarantees. 

“Bad Boy” Clauses

The “bad boy” clause protects lenders against fraudulent borrowers. It allows a limited guarantee to be converted into an unlimited guarantee so the lender can collect what they’re owed without sustaining significant financial losses. 

Vague Language

The contract should specify the terms of the personal guarantee. If not, request clarification from the lender and refrain from signing until you fully understand what’s being stated or the verbiage is modified. 

“Continuing Guarantees”

Continuing guarantees cover the current business loan and any subsequent financing products you get from the lender. Consult with your attorney to determine if you should sign or decline the offer. 

“Joint” and “Several” Language

This is common with limited guarantees that come with business loans taken out by several partners. Before signing, be sure that you understand the percentage of liability you’re assuming to avoid any surprises later on down the line in the unfortunate event that the company faces cash flow issues and defaults.

Should You Get a Business Loan with a Personal Guarantee?

It depends on the financial health of your business and the likelihood that you’ll default on your payments. If possible, reach out to your accountant and attorney to discuss the business loan agreement and ensure the personal guarantee disclosures are sound. 

Find the Right Business Loan for Your Needs

Although many business loans come with personal guarantees, it’s possible to secure the funding you need for your business without putting your personal assets at risk. You’ll have to do some research to find lenders with these types of financing products, however, or you can use National Business Capital to apply with over 75 lenders at once. 

The partners in their lending network offer an assortment of funding options, including small business loans, business lines of credit, equipment financing, SBA loans, accounts receivable financing, merchant cash advances, purchase order financing, commercial mortgage financing, and more. Even better, you could receive the loan proceeds in as little as two hours. 

There’s no hard credit check, and it only takes a minute or so to get started. Plus, you’ll receive personalized offers from lenders if there’s a good fit, allowing you to decide if you want to move forward with securing funding or explore other options.

Apply today to learn more about the competitive, flexible financing options that may be available to you. 

National Business Capital

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