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What is a personal guarantee?
A personal guarantee is a contract that the signer will be personally liable if another party does not pay.
What is an example of a personal guarantee?
An LLC owner asked her bank to loan $50,000 to her LLC. The bank agreed to loan the money to the LLC, but said the owner must sign a personal guarantee so if the LLC didn’t repay the loan, the LLC owner would be personally liable to repay the loan.
What is the risk of a business owner signing a personal guarantee?
Signing a personal guarantee is an easy way to secure a loan for your new business. Essentially, you are telling the bank, “if my business doesn’t pay, I will.” When you sign a personal guarantee for a business loan, you are bringing liability to all assets of your personal life. While every new business owner feels optimistic about the future of their business, signing a personal guarantee is dangerous because you risk losing assets (like your house) if your business runs into problems.
Is signing a personal guarantee the same as cosigning a loan?
A personal guarantee is very similar to cosigning a loan: not only will your business be responsible for the loan, but if the business encounters problems and cannot pay back the loan, you are personally liable, exposing your personal assets to risk. While there are some legal differences between a personal guarantee and cosigning a loan, the details are too technical and boring to cover here, and they wouldn’t be important in most circumstances.
What if the bank says I must sign a personal guarantee to get a business loan?
A personal guarantee should be treated as a last resort for securing a loan. Of course, for most small businesses, the business owner has no other options. The business does not have sufficient credit and assets to borrow money itself, so the bank wants the owner on the hook.
Is it less risky for a business investor to sign a personal guarantee for the business?
No. If you sign a personal guarantee, that means they can sue you personally if the business fails or doesn’t pay its debts. That’s a big risk to you personally. In other words, you are not just putting at risk your investment—you are risking everything you own. Usually, investors don’t sign personal guarantees. By contrast, personal guarantees are often used for business owners who run/manage their own business (not “passive” investors).
Is an ‘unsecured’ personal guarantee less risky?
No. The fact that a guarantee is “unsecured” simply means you are not offering any security (e.g. home mortgage or lien) for the loan. A security interest gives a lender an additional legal right to take whatever property is offered as collateral (security) for the loan. Most personal guarantees are unsecured: a secured personal guarantee would involve a lien or security interest on your property.