When applying for business funding, lenders often ask for a personal guarantee. It’s a common requirement, but not everyone understands what it truly means. A personal guarantee can speed up loan approval, but it also comes with risks. Let’s break down six important facts every borrower should know before signing.
1. A Personal Guarantee Makes You Personally Liable
The main function of a personal guarantee is to hold you personally responsible if the business can’t repay the loan. That means your personal assets—like your home, savings, or car—could be at risk. While it may help secure funding, it also increases your financial responsibility. Lenders use the personal guarantee as a safety net to reduce their risk.
If the business fails, you’re still on the hook. This makes the personal guarantee a serious commitment that shouldn’t be taken lightly.
2. It Can Help You Qualify for Larger Loans
A personal guarantee can actually work in your favor if you need more capital. Since lenders know they’ll be repaid one way or another, they may approve higher loan amounts. This is especially helpful for startups or small businesses without strong financials. Offering a personal guarantee shows that you’re confident in your business’s ability to succeed.
For many borrowers, it becomes the bridge to access funding that wouldn’t be possible otherwise.
3. There Are Two Main Types of Guarantees
Not all personal guarantees are the same. There are limited and unlimited guarantees. With a limited guarantee, your liability is capped to a certain amount or percentage. But an unlimited personal guarantee holds you responsible for the entire loan, including fees and interest.
Understanding the type of personal guarantee you’re agreeing to is critical before signing any contract. Always read the fine print and ask questions if you’re unsure.
4. It Can Affect Your Credit Score
Since a personal guarantee ties your personal finances to the loan, your credit score can take a hit. If the loan defaults and you can’t cover it, your personal credit may suffer. Late payments or collection activity will appear on your report. Even though it’s a business loan, the personal guarantee pulls you directly into the mix.
For that reason, many business owners monitor both their business and personal credit closely when a personal guarantee is in place.
5. You Can Negotiate the Terms
Most borrowers don’t realize that the terms of a personal guarantee are negotiable. You can ask to limit your liability or set a specific guarantee amount. Lenders may be open to adjustments, especially if you have strong financials or good credit. Negotiating the personal guarantee terms can give you more control and peace of mind.
Always involve a lawyer or advisor before agreeing, especially for large loans or complex terms.
6. Removing a Personal Guarantee Is Possible
After building a solid payment history, you may be able to remove the personal guarantee from your loan. Some lenders allow this once certain milestones are met, like 12–24 months of on-time payments. This reduces your personal risk and strengthens your business independence. It’s a great goal to work toward after securing the loan with a personal guarantee.
Ask your lender upfront about their policies and what it takes to remove or reduce the guarantee later.
Final Thoughts: Understand Before You Sign
A personal guarantee can unlock powerful opportunities, but it also carries serious responsibilities. Whether you’re applying for your first business loan or refinancing, it’s important to weigh the risks and benefits. Knowing these six facts will help you make a smarter, more confident choice. Use your personal guarantee wisely—and protect your financial future.
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