Personal Guarantee

Personal Guarantee

A personal guarantee is a legal definition of an individual’s responsibility to repay a business loan if their business is unable to pay it. 

Essentially the loan holder promises to repay a business loan with their own money if necessary.

A personal guarantee makes it more likely that the business owner will be able to secure the business loan. It makes the deal more attractive to banks as they have more assurance that their loan will be repaid. 

However, a personal guarantee carries more risk for the individual taking out the loan, as it can affect them financially. 

When is a Personal Guarantee Needed?

A personal guarantee for a business loan is very common for new entrepreneurs, or seasoned entrepreneurs starting a new business.

Because the business itself is so new and has very little business credit, a personal guarantee lends more credence to the loan request and makes it more likely to be granted. 

Although the business is new and untested, the business owner likely has assets and credit history that make up for the newness of the business. 

It is very common for banks to require a personal guarantee for loans for new businesses. 

Types of Personal Guarantees

There are two types of personal guarantees, limited and unlimited.

A Limited Personal Guarantee has some limits on the amount that may be collected. This type of guarantee may be required in instances where business partners take out a loan together and split the repayment commitment. 

An Unlimited Personal Guarantee means the entire amount of the loan can be collected from the sole loan holder.

Risks of Personal Guarantees

A personal guarantee makes a business loan less risky for banks. 

However, a personal guarantee carries quite a lot of risk for the individual taking out the loan.

If the investment falls through and the business owner is unable to pay off the loan using profits from their business, they must pay the loan using their own personal finances.

If they cannot pay the loan with their personal finances the bank can confiscate personal assets. This may include a house, a car, a retirement account, or a college savings account. 

For best results, a business owner should only offer a personal guarantee on loans they are sure will yield considerable profit so they don’t have to tap into their personal finances to pay them off.