Personal Guarantee Definition | Business Lending Glossary
What is a personal guarantee in business lending? Understand what you're committing to, the risks, and when you can avoid a personal guarantee.
Definition
A legal commitment by a business owner to personally repay a business loan if the business fails to meet its obligations.
Explanation
Most small business loans require at least one owner (usually anyone with 20%+ ownership) to sign a personal guarantee. By signing, you agree that if your business cannot repay the loan, the lender can pursue you personally — including garnishing personal wages, placing liens on your personal property, and reporting the default to personal credit bureaus. Limited guarantees cap the guarantor's liability to a specific amount or percentage. Unlimited guarantees expose the full loan balance. Some lenders also require spousal consent for personal guarantees, depending on state law.
Example
Two co-founders each own 50% of an LLC that borrows $150,000. Both sign a joint personal guarantee. When the business later fails, the lender sues both founders personally and places a lien on the primary founder's personal savings account and home.
Why It Matters
A personal guarantee removes the liability protection that a corporation or LLC normally provides. This is one of the most significant commitments a business owner makes when borrowing. Before signing, understand exactly what you are guaranteeing, whether it is limited or unlimited, and what assets you are putting at risk.
Frequently asked questions
Can I get a business loan without a personal guarantee?
Some financing options — particularly revenue-based products like MCAs, certain business credit cards, and some equipment loans secured entirely by the equipment — may not require a personal guarantee. However, most traditional and SBA loans require one for small businesses without substantial business credit history.
Does a personal guarantee affect my personal credit?
Signing a guarantee alone typically does not affect your credit score. However, if the loan defaults and the lender pursues you personally, the collection activity and any resulting judgments will appear on your personal credit report and significantly damage your score.
