Defining the Personal Guarantee
Oftentimes, business owners seeking out a business loan may be asked to sign a personal guarantee. What is a personal guarantee and what does it mean for their business and them personally? Read on to find out
What is a Personal Guarantee?
When applying for a business loan, lenders might ask applicants to sign a personal guarantee stating that they’ll be personally responsible for the debt if the business defaults on the loan. This document means that the business owner must pay back the loan from personal assets if the business is unable to pay back the loan.
When you take out a mortgage on a home, the value of the home itself ensures the lender won’t absorb all the costs of default. Lenders like to have some assurance that they won’t lose money if you’re unable to repay the loan.
When are Lenders Likely to Ask for a Personal Guarantee?
There are several reasons why a lender might ask a small business owner to sign this type of agreement, including:
- The business isn’t well-established yet
- The business doesn’t have many assets
- You’re not offering any type of collateral to back the loan
- The owner’s personal credit score is low
- The business’ credit rating is low or hasn’t been well-established
The Pros and Cons of Signing a Personal Guarantee
Unsurprisingly, the major pro is the business can get the loan they need! It may be the only way some business owners qualify for a loan, so it can be a window to funding when it may be desperately needed.
On the flip side, personal guarantees are difficult to get out of, so even if the business gains assets to back the loan, the owner could still be held personally liable for loan default.
Does Registering as an LLC Mean You’re No Longer Personally Responsible for Personally Guaranteed Debt?
People often register their business as a limited liability corporation (LLC) to limit personal liability for debts or judgments brought against the business. However, the ‘limited’ applies when a personal guarantee has been signed. The personal guarantee provides a kind of bridge over the LLC so the lender can access personal assets to pay back the loan.
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