A personal guarantee requirement is a common clause lenders include in business loan agreements to mitigate their risk, especially with startups or small businesses lacking established credit or assets. By signing a personal guarantee, the business owner pledges to cover the loan repayment with personal assets such as a home, savings, or other valuables if the business defaults.
Typically, a Limited Liability Company (LLC) or corporation protects owners from personal responsibility for business debts, but a personal guarantee overrides this protection for that specific loan. The Small Business Administration (SBA) requires an unlimited personal guarantee from owners holding 20% or more equity on SBA loans (see SBA.gov for details).
When a business cannot repay its loan, lenders can pursue the guarantor’s personal assets to recover losses. This responsibility can be either unlimited, exposing the guarantor to the full amount plus interest and fees, or limited, where liability is capped or shared among partners.
For instance, Sarah’s Bakery needed a $50,000 loan with a personal guarantee for outfitting her new LLC. When business thrived, no personal funds were needed. However, if she defaulted, the lender could claim her personal assets to cover remaining debts.
To manage risk when signing a personal guarantee, consider negotiating a limited guarantee, adding a sunset clause to terminate the guarantee after consistent payments, and understanding any spouse involvement, especially in community property states. Keeping personal and business finances separate aids in clarity and financial management.
For more on how personal guarantees can impact your loan and business, explore related topics like Business Loan Agreement and Limited Liability Company Loan (LLC Loan).
Additional authoritative information on personal guarantees can be found on the SBA website and from the Consumer Financial Protection Bureau.