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A personal guarantee is a promise to pay back a loan yourself if your business can't. It puts the risk on your personal assets. So your savings, your personal real estate, and your car could all be at risk if you default.
I've spent more than 15 years in business financing, and a personal guarantee is the document small to midsize businesses (SMBs) ask me about the most. Many sign it without reading it closely.
Below, I'll go over how it works, the three types you'll encounter, and what's at stake if you default.
How a Personal Guarantee Works
A personal guarantee gives the lender a second place to collect from if you default on the loan. It reduces their risk, particularly if your business is young, your credit is thin, or you experience revenue swings.
A personal guarantee isn't the same thing as collateral.
| What it is | What the lender can take |
|---|---|
| Collateral | A specific business asset, like equipment, that you pledge. The lender takes that asset and nothing else if you default. |
| Personal guarantee | Backed by you personally. The lender can pursue your personal assets (car, home, savings) if you default on the loan. |
It isn't necessarily one or the other. You can have both on the same loan. A secured business loan, for example, can come with a personal guarantee on top of the collateral.
Who Signs a Personal Guarantee?
This depends on the lender. For U.S. Small Business Administration (SBA) loans, anyone who holds at least 20% ownership must guarantee the loan. Online lenders and banks typically use a similar cutoff, but it varies.
If you default, the lender can come after the guarantor for the full balance. That includes late fees, attorney fees, and court costs on top of the loan itself. Some agreements also include an acceleration clause, which lets the lender demand the entire balance if you break any term of the contract.
The Three Types of Personal Guarantees
There are three different types of personal guarantees. Know the kind in your agreement before you sign.
Unlimited personal guarantee
You're on the hook for the entire loan, interest, and legal fees. This is typical of SBA loans.
Limited personal guarantee
Your liability stops at a certain share or percentage of the loan.
Joint and several guarantee
Multiple owners sign, and the lender can collect the full balance from any of them. If one person can't pay, the others are responsible for the full balance.
Why Business Owners Sign a Personal Guarantee
Potentially signing away your personal assets can be daunting, but a personal guarantee can open up doors that business credit alone can't. Here are some of the pros of a personal guarantee.
Access to financing
If you have a short credit history or few assets, personal guarantees allow you to qualify for financing when you otherwise wouldn't.
Better terms
If you have strong personal credit, a personal guarantee can unlock a lower rate for your business.
Credit building
Paying on time helps to improve your creditworthiness.
The Risks You Take On
You do take on some personal liability with a personal guarantee. If you default, the lender can seize your personal assets. That could mean a lien on your home, claims against your savings, or wage garnishment. This depends on your state and what the agreement says. Retirement accounts receive some protection under federal law, but the rules vary by account type.
A default can hurt your ability to borrow in the future, since it shows up on your personal credit report in addition to your business credit report. I tell all of my clients to have an attorney review their agreement before they sign. Lawyers can help you better understand what risk you're taking on, including things that might not be immediately obvious.
Alternatives To a Personal Guarantee
Most unsecured business loans still come with some form of guarantee, unless your business has extremely strong revenue and a track record to back it up. Here's how different financing handles collateral and guarantees.
| Financing type | How it handles collateral | What it means for a guarantee |
|---|---|---|
| Asset-secured financing | An asset backs the loan, like equipment or an invoice. | The asset carries much of the risk. Guarantee terms may be lighter. |
| SBA loans | Collateral may be required, depending on the size of the loan and the program | Owners at 20% or more typically sign an unlimited guarantee |
| Revenue-based financing | No collateral is required, since approval runs on your bank statements. | Varies by lender; confirm what the agreement asks for |
Asset-secured financing keeps the risk on a business asset. Equipment financing and invoice factoring work this way. If the business defaults, the lender takes the equipment or the unpaid invoice.
A home equity line of credit (HELOC) lets you put personal property behind business financing, securing the line with your home.
Revenue-based financing runs on your bank statements. Business lines of credit, term loans, and merchant cash advances work this way.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
Weighing Risk Against Access
A personal guarantee may get you access to financing that you might not otherwise qualify for, but make sure you understand the risks. Whether it's right for you depends on your risk tolerance, your assets, and your ability to pay back the loan.
Weigh your options before you commit to anything. Apply today, and a lending advisor at Clarify Capital can go over what our lender network can do for your business. Checking your options won't affect your credit score.
Frequently Asked Questions (FAQs) on Personal Guarantees
Here are the most common questions I hear from SMBs on personal guarantees.
Can a Personal Guarantee Be Enforced on a Business Loan?
Yes, a personal guarantee is a binding contract. The collection process depends on your state. Some guarantees are enforceable even if a business closes. I recommend having an attorney review your agreement before you sign.
Can an LLC Get a Loan Without a Personal Guarantee?
It depends on the business. LLCs that qualify for loans without a personal guarantee typically have several years of operating history, steady revenue, and strong business credit. Newer LLCs are usually asked to sign one.
Are You Personally Liable for a Small Business Loan?
It depends on whether you signed a personal guarantee. With one, you're personally responsible for whatever the business doesn't pay. Without one, your personal assets stay separate; the business carries the debt.
Do Commercial Loans Require a Personal Guarantee?
Yes, most do. Banks, online lenders, and SBA lenders use guarantees regularly. Ask your lender for the specifics before you close.
How Does a Personal Guarantee Affect Your Credit Score?
Signing a personal guarantee won't change your score. But many lenders report loans that are personally guaranteed to business and consumer credit bureaus. Late payments and defaults bring your score down.
Is My Information Secure?
Clarify Capital follows SOC 2 security principles. Our application collects only what a lending advisor needs to match you with lenders in our network. We don't sell your information.
Michael Baynes
Co-founder, Clarify
Michael has over 15 years of experience in the business finance industry working directly with entrepreneurs. He co-founded Clarify Capital with the mission to cut through the noise in the finance industry by providing fast funding and clear answers. He holds dual degrees in Accounting and Finance from the Kelley School of Business at Indiana University. More about the Clarify team →
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