Business owners are often asked to sign personal guarantees when they borrow or get terms from vendors for their business. It’s frustrating, but try not to take it (ahem) personally.
Here’s what you need to know about personal guarantees from lenders and vendors:
Lenders and vendors often require personal guarantees (also known as “PGs”) from businesses that are young, as well as those that lack strong business credit scores and/or solid financials (such as sufficient income or cash flow). If you think about it from their perspective, they are taking a risk by providing goods or services without getting paid up front, and they know that business owners who provide personal guarantees are more likely to pay those bills.
Personal guarantees are not ideal, but are sometimes necessary. In the early stages of your business, you may have no choice but to agree to one. Note that just because you sign a PG does not mean the loan or account will automatically affect your personal credit reports or scores. Most commercial accounts do not appear on personal credit reports unless the borrower defaults. However, there may be an inquiry on one or more of your personal credit reports if the lender checks your credit. Inquiries have a small impact on credit scores–usually in the range of 4 to 7 points–and only affect personal credit scores for one year.
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A personal guarantee means that you are personally responsible for the debt if your business does not pay it. For that reason, you do want to use them strategically and selectively. You should feel confident that your business can financially handle the debt. If you don’t, then it may be a sign you should look for other opportunities to grow your business. Business credit should help your business grow; it can’t save a business that is not going to make it anyway.
What You Can Do
Build strong business credit scores. This is the single best way to get away from personal guarantees. If you have not begun that process, get a free account with Nav and follow the steps outlined in the free Business Launcher tool available to all members.
If your business already has a strong commercial credit history, ask to speak with a credit manager and explain the situation. You may be able to get a waiver of the personal guarantee. You can check your business credit ratings for free at Nav.
If you do not want to provide a personal guarantee, be sure to check the lender or vendor’s credit policy before you apply. The credit application will usually indicate if one is required. If it’s not clear, ask.
Don’t shotgun your applications to multiple lenders in hopes of finding one that won’t request a PG; doing so can result in multiple inquiries on your credit reports, which in turn can hurt your credit scores.
More answers to pressing questions:
This article was originally written on March 10, 2016 and updated on February 5, 2024.
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