Lesson 3 of 25
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The Personal Guarantee

⏳ Video Length — 00:08:36

Lesson Summary

Many small business owners are surprised if a lender asks for a personal guarantee when they apply for a business credit card or loan. Most lenders require personal guarantees. It reduces the lender’s risk associated with the loan or card because it gives the lenders the right to pursue a borrower’s personal assets if your business fails to repay the debt.

Because this is a standard practice for most lenders that offer loans to small businesses, it’s nothing to be alarmed about, but it is important you understand how personal guarantees work and what it might mean for your personal finances and your business.

What is a Personal Guarantee?

A personal guarantee is just what it sounds like. It gives your lender the right to pursue your (the guarantor’s) personal assets — including cash, real estate, and other assets or investments you might have — if your business defaults on a business loan. A personal guarantee helps business owners get approved for a loan if the business doesn’t have its own credit rating.

By agreeing to a personal guarantee, the business borrower is agreeing to be 100 percent personally responsible for the repayment of the account, in addition to any collection, legal, or other costs related.

How Could a Personal Guarantee Impact a Borrower’s Personal Finances?

Be aware that if you personally guarantee a small business loan or credit card, and the company is unable to make timely payments, it will also likely reflect negatively on your personal credit rating. This could also apply to a business credit card or any other type of small business debt.

Should You Sign a Personal Guarantee?

Whether or not you should sign a personal guarantee ultimately depends on your ability and willingness to take risks. In the beginning, it may be helpful when looking to jumpstart your business growth.

But, it’s best to move away from personal guarantees as your business evolves. Once you build credit for your business and gather assets for collateral, you can stop guaranteeing loans and credit cards personally. 

In the meantime, minimize your risks by borrowing wisely. This course will give you the tools, guidelines, and best practices to follow and minimize your financial risks.