How a personal guarantee on a business loan works | finder.com
Person signing a personal guarantee agreement

How a personal guarantee on a business loan works

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What you should know before you personally back a business loan.

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 your business just barely makes a lender’s requirements for revenue and time in business. We break down what it means, how it can help and when you might want to consider other options that don’t put your family’s finances on the line.
OnDeck Small Business Loans

OnDeck Small Business Loans

Among the largest online business lenders offering term loans and lines of credit at competitive fixed rates.

  • Minimum Amount: $5,000
  • Maximum Amount: $500,000
  • Loan Term: 3 to 36 months
  • Simple online application process with fast decisions
  • Dedicated loan specialists and loyalty benefits
  • Must have been in business for at least one year with annual revenue of $100,000+
  • Must have a personal credit score of 500+

    What is a personal guarantee?

    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 that 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. Many small business lenders require a personal guarantee because small businesses can be risky to lend to.

    How risky? Around 20% of small businesses with employees fail in their first year, while only about half make it past the fifth, according to a Bureau of Labor Statistics Study. Businesses in certain industries like construction and transportation are even more likely to fail in their first year. A personal guarantee reassures the bank that it’s going to get its funds whether or not your business survives.

    Types of personal guarantees

    There are a few of 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. 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, home or permanent life insurance policy — 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. With a limited personal guarantee, typically any business owner with at least 20% of ownership is required to throw their hat in the ring.

    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. Or, you might 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.

    Know what you're signing

    Some business lenders ask for a personal guarantee somewhere between a limited and unlimited personal guarantee. For example, there might be a clause in your contract that allows your limited guarantee to become unlimited in certain situations.

    Don’t speak legalese? This might be a good time to seek out some professional advice. Personal guarantees can be a huge risk to you and your family. Some contracts are written in purposefully vague language that could potentially help your lender take advantage of legal loopholes.

    Compare business loans that use personal guarantees

    Rates last updated December 15th, 2018
    Unfortunately, none of the business loan providers currently offer loans for these criteria.
    Name Product Product Description Min Loan Amount Max. Loan Amount Requirements
    OnDeck Small Business Loans
    A leading online business lender offering flexible financing at competitive fixed rates.
    $5,000
    $500,000
    500+ personal credit score, 1+ years in business, $100,000+ annual revenue
    Kabbage Small Business Line of Credit
    A simple, convenient online application could securely get the funds you need to grow your business.
    $500
    $250,000
    1+ years in business, $50,000+ annual revenue or $4,200+ monthly revenue over last 3 months
    Funding Circle Business Loans
    $25,000
    $500,000
    620+ personal credit score, 2+ years in business, for-profit business in an approved industry
    SmartBiz SBA Loans
    Get funding for your small business with a government-backed loan and extended repayment terms.
    $30,000
    $5,000,000
    650+ personal credit score, US citizen or permanent resident, 2+ years in business, $50,000+ annual revenue, no outstanding tax liens, no bankruptcies or foreclosures in past 3 years
     SellersFunding Business Loans
    Cashflow solutions up to $100,000 made for Amazon sellers.
    $5,000
    $250,000
    Have six months of Amazon sales history, made at least $30,000 over the past six months, have positive customer feedback, have few returns, have consistent sales activity.

    Compare up to 4 providers

    Pros and cons of a loan with a personal guarantee

    Pros

    • Increases chances of approval. A personal guarantee takes some of the risk off your lender’s shoulders, making them more willing to work with your business.
    • Can help you get competitive rates. The most competitive rates on a business loan generally go to the lowest-risk clients.
    • Not tied to specific collateral. Personal guarantees offer more flexibility than a secured loan since you don’t have to put any specific assets on the line.

    Cons

    • It’s a personal risk. Losing your business is already a personal financial hit. A personal guarantee could require you to pay off a loan at the worst possible time.
    • Can be hard to get out of. This can be an issue if you sell your business in the future — you’ll still be on the hook if that business fails if you don’t change your contract.
    • Your personal finances count more. Lenders often pay closer attention to business owners’s personal assets and creditworthiness when a personal guarantee is on the table, meaning that you could have trouble getting approved if you or your partner have poor credit.

    Do all business loans require a personal guarantee?

    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: unsecured term loans and lines of credit. And most business loans that require collateral don’t typically ask for a guarantee as well. Some equipment and vehicle leases come with a personal guarantee, however.

    What if I don’t have a lot of personal assets?

    Since a personal guarantee doesn’t require any fixed assets — like your apartment or family heirlooms — you don’t necessarily need to have any to personally guarantee a loan. However, you typically need to have some some sort of funds to show you’ll be able to pay off the loan. You’ll also need to meet certain credit score criteria to get approved for a personal guarantee. In some cases, you might be required to submit a list of all your assets and liabilities during the application process — even if it isn’t much.

    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 for 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 college 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 installments. 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.

    True, invoice factoring often requires a personal guarantee. But 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.

    Compare even more business financing options

    Rates last updated December 15th, 2018
    Unfortunately, none of the business loan providers currently offer loans for these criteria.
    Name Product Product Description Min Loan Amount Max. Loan Amount Requirements
    LoanBuilder, A PayPal Service Business Loans
    Customizable loans with no origination fee for business owners in a hurry.
    $5,000
    $500,000
    Annual business revenue of at least $42,000, at least 9 months in business, personal credit score of 550+.
    LendingTree Business Loans
    Multiple business financing options in one place including: small business loans, lines of credit, SBA loans, equipment financing and more.
    Varies by lender and type of financing
    Varies by lender and type of financing
    Varies by lender, but you many require good personal credit, a minimum business age and minimum annual revenue.
    Credibly Business Loans
    Funding to cover business expenses with daily or weekly repayments.
    $5,000
    $250,000
    500+ personal credit score, 6+ months in business, $15,000+ average monthly deposits
    Lendio Business Loan Marketplace
    Submit one simple application to potentially get offers from a network of over 75 legit business lenders.
    $500
    $5,000,000
    Must operate a business in the US or Canada, have a business bank account and have a personal credit score of 560+.
    National Funding Small Business Loans
    Working capital loans and equipment financing, some high-risk industries may be eligible.
    $5,000
    $500,000
    Be in business at least one year and make at least $100,000 in annual sales. Other loan types have additional requirements.
    LendingClub Business Loans
    With loan terms that vary from 1 to 5 years, enjoy fixed monthly payments and no prepayment penalties through this award-winning lender.
    $5,000
    $300,000
    12+ months in business, $50,000+ in annual sales, no bankruptcies or tax liens, at least 20% ownership of the business, fair personal credit score or better
    OnDeck Small Business Loans
    A leading online business lender offering flexible financing at competitive fixed rates.
    $5,000
    $500,000
    500+ personal credit score, 1+ years in business, $100,000+ annual revenue
    Fora Financial Business Loans
    No minimum credit score requirement and early repayment discounts for qualifying borrowers.
    $5,000
    $500,000
    Business age 6+ months. Monthly revenue $12,000+. No open bankruptcies.

    Compare up to 4 providers

    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 help if you can’t make heads or tails of it.

    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 options. A good place to start is our business loans guide, where you can learn about more types of business financing and start comparing lenders.

    Frequently asked questions

    Anna Serio

    Anna Serio is a staff writer untangling everything you need to know about personal loans, including student, car and business loans. She spent five years living in Beirut, where she was a news editor for The Daily Star and hung out with a lot of cats. She loves to eat, travel and save money.

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