You’ve spent a great deal of time researching your options for business formation, and you selected a modal that puts some legal distance between you and your company.
So, why is a lender asking for a personal guarantee when you apply for a business loan?
What’s a personal guarantee?
Basically, it’s your promise to the lender that you’ll personally repay the money they lend to your business if the business can’t make the payments. Personal guarantees are often required from the executive officers or business partners of smaller, less-established business entities if they want credit from a bank. Even the Small Business Administration (SBA) requires personal guarantees from company principals to get a loan.
In practical terms, this means that the lender wants to reduce the risk they’re taking by extending credit to your business. It also means they will probably try to claim your personal assets — including real estate, vehicles and bank accounts — if the debt isn’t repaid.
Here’s the catch: You may not realize that you’re giving a personal guarantee (or what it means) unless the lender is specific in explaining it to you. Personal guarantees can be limited or unlimited. A limited personal guarantee only puts you on the hook for a certain percentage of the debt — usually divided by the number of principals or owners who are signing. An unlimited guarantee puts every signer on the hook for the whole debt.
Should you give a personal guarantee?
Maybe, but it’s unwise to make any financial promises or sign any business paperwork without carefully investigating the legal pros and cons, especially when your personal assets may be on the line.