Everything a Small Business Needs to Know About a Personal Guarantee
As you’re going through the process of applying for a business loan, it’s easy to get distracted by the end-goal of acquiring funds that you miss some of the finer points of the loan structure. One of those is whether you’ll be required to provide a Personal Guarantee on the debt. Before you sign on the dotted line, it’s important to understand what a personal guarantee is and how it could impact you.
What is a Personal Guarantee?
A personal guarantee is an individual’s legal promise to repay credit issued to a business for which they serve as an executive or partner. Providing a personal guarantee means that if the business is unable to repay the debt, then you’ll be personally responsible for repayment.
A personal guarantee can be limited or unlimited:
- An unlimited personal guarantee allows the lender to recover 100 percent of the loan amount , plus any legal fees associated with the loan. Unlimited guaranties are the most common, and the lender would need just cause to not require it.
- A personal guarantee is considered limited as there is a set a dollar limit on what can be collected from you if you default on your loan. Limited guaranties are mostly used in situations when there are multiple owners of the business guaranteeing the debt, and the dollar limit is usually set equal to each owners’ respective ownership percentage.
Who is required to provide a Personal Guarantee?
Financial institutions will have different internal policies. However, most lenders follow the guidelines laid out by the Small Business Administration (SBA):
“For all SBA loans, personal guaranties are required from every owner of 20 percent or more of the business, as well as from other individuals who hold key management positions. Whether a guaranty will be secured by personal assets or not is based upon the value of the assets already pledged and the value of the assets personally owned compared to the amount borrowed.”
The practice of requiring personal guarantees is standard for most business lenders. It’s nothing to be alarmed about! Be sure to discuss this topic with your lender so that you understand how it might impact you.