A personal guarantee is an agreement that lets a lender pursue an individual guarantor for business debt under the contract. Forming a corporation or limited liability company does not neutralize a separate guarantee the owner signs personally.
Read the scope
A guarantee may cover a specific loan amount or a broader set of present and future obligations. It may be limited or unlimited, joint with other guarantors, and supported by personal collateral. The exact language controls.
Questions for counsel and the lender
- Which debts and future advances are covered?
- Is liability capped by amount or percentage?
- Can the lender pursue one guarantor for the full balance?
- What personal assets are pledged?
- When, if ever, can the guarantee be released?
- What happens after ownership changes or the business is sold?
Model the downside
Compare business cash flow with scheduled debt service, then assume revenue falls and collateral sells for less than expected. Consider the effect on personal emergency savings, housing, retirement planning, and other household obligations. State law and exempt-property rules can matter, so qualified legal advice may be valuable.
Negotiate before signing
Possible discussion points include a dollar cap, a declining guarantee as principal falls, release after performance milestones, limits on future advances, and notice before material changes. A lender may decline these terms, but the borrower should understand the accepted risk.
Maintain records
Keep the note, guarantee, security agreement, modifications, payment history, payoff confirmation, and written release. When a loan is refinanced or replaced, verify whether the old guarantee ends and whether a new one begins.
A personal guarantee can unlock business credit, but it does so by moving risk across the line between the business and the household. Price that risk as seriously as the interest rate.