How a personal guarantee on a business loan works

If you’ve spent some time searching for a business loan, chances are you’ve come across more than one that asks for a personal guarantee from the owner (or owners). It’s a common feature of small business financing, especially if you own 20% or more of the business. It is also additional security for the lender, especially if you just barely meets their requirements for revenue and time in business.

But what are the risks of personally guaranteeing a business loan – and when might you want to consider other options that don’t put your family’s finances on the line?

What is a personal guarantee on a business loan?

When you sign a personal guarantee on a business loan, it means that you’re on the hook for paying off all – or part of – your business’s debts if your business can’t. Personal guarantees are unsecured, meaning they aren’t tied to a specific personal asset like your home or your car — you’re just responsible for paying up by whatever means you can. Many small business lenders require a personal guarantee because small businesses can be risky to lend to.

How risky? Approximately 7,000 businesses go bankrupt each year in Canada, and less than 70% of businesses make it to their fifth year in business. Businesses in high-risk industries, like construction and transportation, are even more likely to fail in their first year or two. So, a personal guarantee reassures the lender that it’s going to get its funds back – whether or not your business survives.

Types of personal guarantees

There are a couple of different types of personal guarantees out there.

• An unlimited personal guarantee means that you’ll cover the total loan cost if your business can’t pay off its debt, along with any associated legal fees. This is the least risky option for the lender and the most risky one for you as a business owner. If you’re unable to pay off the loan with the money you have, your lender might be able to get a judgment to take any personal assets you have — like your car or home — to cover the remaining cost of the loan.
• A limited personal guarantee is more forgiving. Here, your lender sets a cap to how much you’d owe in the event of a business failure.
  • A limited personal guarantee might come in the form of a several guarantee, where business owners are each on the hook for a fixed percentage of the loan amount, usually the same as your percentage of ownership.
  • You might also come across a joint and several guarantee, where each owner could potentially be responsible for paying off the full amount of the loan. Worst case scenario here: Your business flops and your partner skips town, leaving you to cover the full cost of the loan on your own.

Compare business loans

Most small business loan lenders require a personal guarantee – however risk levels will vary depending on the lender, loan type and loan amount. Before applying for a loan, contact the lender in question to discuss the terms of a personal guarantee.

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Name	Product	Interest Rate	Loan Amount	Loan Term	Minimum Revenue	Minimum Time in Business	Loans Offered
OnDeck Business Loan		8.00% – 29.00%	$5,000 - $300,000	6 - 18 months	$100,000/year	6+ months	Secured Term, Line of Credit, Merchant Cash Advance	To be eligible, you must have been in business for at least 6 months with a minimum annual gross revenue of $100,000. OnDeck offers fast and simple financing. Apply in less than 10 minutes with your basic business information and see your loan offers without hurting your credit score. Get approved within 1 business day, and choose your term, amount and payback schedule once approved.	Go to site More Info	Compare	loading Fetching your data...
Merchant Growth Business Loan		12.99% - 39.99%	$5,000 - $500,000	3 - 12 months	$10,000 /month	6 months	Unsecured Term, Line of Credit, Merchant Cash Advance	To be eligible, you must have been in business for at least 6 months and have a minimum of $10,000 in monthly sales. Merchant Growth offers financing tailored to business needs. It specializes in providing capital based on future cash flows, but it also offers fixed solutions. Fill out an application within 5 minutes and get your funds within 24 hours.	Go to site More Info	Compare	loading Fetching your data...
Loans Canada Business Loan		6.60% - 29.00%	$4,000 - $500,000	3 - 60 months	over $10,000/month	100 days	Unsecured Term	To be eligible, you must have been in business for at least 100 days, have a Canadian business bank account and show a minimum of $10,000 in monthly deposits ($120,000/year). Loans Canada connects Canadian small business owners to lenders offering financing up to $500,000. Complete one simple online application and get matched with your loan options.	Go to site More Info	Compare	loading Fetching your data...

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Pros and cons of a loan with a personal guarantee

Do all lenders require a personal guarantee on a business loan?

No, it’s possible to find a business loan without a personal guarantee. Personal guarantees tend to come in more traditional forms of business financing like unsecured term loans and lines of credit. And most business loans that require collateral don’t typically ask for a guarantee as well as the collateral. Some equipment and vehicle leases do come with a personal guarantee, however.

Alternatives that don’t involve a personal guarantee

There’s no way around it: Personal guarantees are a huge risk that can affect you and your family. Here are some other options you might want to consider instead of taking on that responsibility.

• Secured business loan. Instead of putting your personal property on the line, consider using your business’s assets to get a secured loan instead. If your business can’t pay off the loan, your lender will come in and take the collateral. There’s no risk of suddenly becoming homeless or losing your kid’s university fund. Many property, equipment and business vehicle loans are secured with the property, equipment or vehicle your business buys.
• Merchant cash advance. This type of financing for retail and e-commerce businesses gives your business an advance on its future sales. While it isn’t backed by collateral necessarily, you typically pledge to pay a percentage of your business’s revenue instead of making repayments in fixed instalments. Due to the more flexible repayment structure, most merchant cash advances don’t require a personal guarantee.
• Invoice factoring. Invoice factoring is when your business sells its unpaid invoices at a discount to a factoring company. Your clients then pay back the company, rather than your business. While invoice factoring often requires a personal guarantee, it’s rarely used because you typically won’t be able to qualify for invoice factoring if your clients don’t have a history of making payments on time. And even if it does come into play, you typically won’t be on the hook for the whole amount unless all of your clients don’t pay up on time.

Bottom line

Personal guarantees might be standard for many business loans. But they can also be risky, especially for a new business. Make sure you understand your personal guarantee contract and hire legal help if there’s anything you’re unsure of.

If you don’t have strong personal finances — or just don’t want to take on that responsibility — you might want to look into other financing options. A good place to start is our business loans guide, where you can learn about other types of business financing and start comparing lenders.

Frequently asked questions

• Does a personal guarantee affect my credit score?

  It can. If your business defaults on a loan you personally guaranteed, it’ll lower your personal credit score. A guarantee might also hurt your personal credit score if your business is late on making a repayment.

• Does a business loan show up on my personal credit report?

  It depends on your lender. Some lenders report business debt to both business and personal credit bureaus – regardless of whether or not repayments are on time – while others may just report to either personal or business bureaus. If your business defaults on a loan you personally guaranteed, that’ll show up on your personal credit report as well.