Education Library · Foundations · Article 5
A plumbing and heating owner with about 25 to 30 employees ordered three new trucks. His existing bank loan was already in the business name with his personal guarantee on it, and when he went to the manufacturer’s financing arm for the new trucks, they asked him to personally guarantee those too. He also owned rental properties on the side, and the same thing had happened there. In his words: “you get all hocked up on everything, and everything’s personally guaranteed, and then it’s just kind of, the bigger you get.”
Most owners collect guarantees that way, one signature at a time, and few go back and add them up.
What a personal guarantee is
A personal guarantee, often called a PG, is a promise you make as an individual to pay a business debt if the business doesn’t. The company is the borrower. Your guarantee gives the lender a second place to collect: you.
One of the main protections of an LLC or corporation is that the company’s debts belong to the company. A personal guarantee sets that protection aside for that debt. If the business can’t pay, the lender can come after your personal bank accounts, your personal assets and in some cases your house, depending on the agreement and your state’s laws.
A guarantee is different from co-signing. A co-signer is a borrower on the loan alongside the business. A guarantor stands behind the borrower. On a call with a part-time handyman owner shopping for his first work truck, Rivenway founder Paul Childers put the practical version this way: “I want to buy this for the business, I’m happy to personally guarantee it, but I will not co-sign it.” How a guaranteed account shows up on your personal credit depends on the lender and the product, so it’s worth asking where the account will report before you sign.
Why almost all small business credit has one
Lenders ask for guarantees because a small business and its owner are hard to separate from the outside. The owner controls the money and usually has a longer credit history than the company, and a guarantee gives the owner a direct stake in the debt getting paid.
It’s standard on most bank loans, equipment and vehicle financing, leases, many business cards and plenty of supplier accounts. Under SBA rules, anyone owning 20 percent or more of the business generally must guarantee the loan, and the lender can ask other people to guarantee it as well.
Guarantees that come off, or never go on, tend to follow business strength: time in business, revenue, clean financials, a solid business credit file and collateral. Even then, a business with good numbers will still see guarantees on a lot of its credit.
Unlimited and limited guarantees
An unlimited guarantee covers the full amount owed, plus whatever else the agreement adds, which often includes interest, late fees and the lender’s collection and legal costs. This is the most common kind in small business lending.
A limited guarantee caps your exposure, usually at a dollar amount, a percentage of the balance or a share tied to your ownership. Some shrink as the loan is paid down. They’re more common when there are several owners or the business has strong collateral of its own.
Read for the word “continuing” too. A continuing guarantee can cover future debts the business takes on with that lender, not only the loan in front of you. A guarantee signed for one equipment loan can end up covering a line of credit opened three years later.
Joint and several
When more than one person guarantees the same debt, the agreement often makes them “jointly and severally” liable. That means the lender can collect the entire amount from any one of them. If you and a partner each own half and both sign, the lender can pursue whichever of you has the assets, and sorting out who owes whom is left to the two of you.
Spouses and other signers
Owners are often asked for a spouse’s signature. Federal rules under the Equal Credit Opportunity Act generally prevent a lender from requiring a spouse’s signature when the applicant qualifies on their own. There are exceptions. A lender can require a spouse to sign documents needed to reach jointly owned property, community property in states that have it, or property pledged as collateral. If the applicant doesn’t qualify alone, the lender can ask for an additional guarantor, but it can’t insist that person be the spouse.
What happens if the business can’t pay
When a guaranteed debt goes into default, the lender usually goes after the business and its collateral first, but most agreements don’t require that. Many guarantees let the lender demand payment from the guarantor right away.
If the business closes or files for bankruptcy, the guarantee generally survives, and selling the business doesn’t end it unless the lender releases you in writing.
Confessions of judgment
Some agreements include a confession of judgment, where you agree in advance that the lender can get a court judgment against you if you default, without first filing a lawsuit you get to answer.
Their legality varies by state. A federal rule bans them in consumer credit, but that rule doesn’t cover business debt. Some states prohibit or restrict them. New York, for example, changed its law in 2019 so they can’t be used against people who live outside the state. If you see one in an agreement, have an attorney look at it before you sign.
What to read before you sign
The guarantee is usually a page or two near the back of the loan package. Look for:
- Whether it’s unlimited or capped, and what the cap is
- Whether it’s continuing and covers future debts
- Who else is signing, and whether liability is joint and several
- Whether it covers interest, fees and collection costs
- Any waiver language, where you give up the right to notice or to have the lender pursue the business first
- A confession of judgment clause
- How and when the guarantee can be released
It also helps to keep a list of every guarantee you’ve signed, with the lender, the amount and whether it’s still open.
Guarantees are legal contracts, and the details depend on your state and the specific agreement. Questions about what one means for you or your personal assets are for your attorney.
This article is educational and isn’t legal, tax, accounting or lending advice. Program rules, lender terms and credit bureau practices change, so verify current terms before acting.
Command your own path.