If you\u2019ve spent some time searching for a business loan, chances are you\u2019ve come across more than one that asks for a personal guarantee from the owner (or owners). It\u2019s 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.<\/p>
But what are the risks of personally guaranteeing a business loan \u2013 and when might you want to consider other options that don\u2019t put your family\u2019s finances on the line?<\/p>
When you sign a personal guarantee on a business loan, it means that you\u2019re on the hook for paying off all \u2013 or part of \u2013 your business\u2019s debts if your business can\u2019t. Personal guarantees are unsecured, meaning they aren\u2019t tied to a specific personal asset like your home or your car \u2014 you\u2019re 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.<\/p>
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\u2019s going to get its funds back \u2013 whether or not your business survives.<\/p>
There are a couple of different types of personal guarantees out there.<\/p>