Personal Guarantee

What Is a Personal Guarantee?

A personal guarantee is a legal commitment in which an individual agrees to repay a debt or meet an obligation if the party that owes it cannot. The most common setting is business lending. When a company borrows money, a lender may ask the owners, directors or principals to sign a personal guarantee. If the business cannot pay, the lender can seek repayment from the guarantor's personal assets, not only from the company's.

How It Works

Normally a company is a separate legal entity, so its debts belong to it. limited liability protections are designed to keep owners from being personally responsible for those debts. A personal guarantee creates an exception. The guarantor makes a direct promise to the lender, which can remain in force even after the business is closed.

Guarantees differ in scope. An unlimited guarantee covers the full amount owed, typically including interest and collection costs. A limited guarantee caps the guarantor's exposure at a stated sum or share of the debt. A continuing guarantee may apply to future borrowing as well as the current loan. The signed document controls, so its wording matters.

Lenders often request a guarantee when a loan is an unsecured loan or is backed by little collateral, since it gives them a second source of repayment. If the borrower falls behind and enters default, the lender can pursue the guarantor under the agreed terms.

Advantages and Disadvantages

For borrowers, a personal guarantee can make credit available to a young business with few assets. For guarantors, the drawbacks can be significant:

• Personal assets, such as savings or a home, may be at risk.
• The obligation may outlast the business or the guarantor's involvement, depending on the terms.
• Even a limited guarantee exposes the guarantor to losses up to the cap.
• Removing a guarantee later usually requires the lender's agreement.

Why It Matters to Investors

Personal guarantees are most relevant to private companies, where owners often borrow personally to fund the business. An investor evaluating a private firm may ask whether founders have given guarantees, since these affect how much risk the owners carry personally and how the company's financing is structured. Publicly traded companies usually carry their debt on their own balance sheets, so personal guarantees are less common in that setting.