Any business loan represents risk for the lender — the risk of not getting repaid in full. Before your application can be approved, the lender is going to take steps to make sure doing business with you is a good decision. (This is true whether you are applying for funding to grow your business or seeking a loan for personal reasons.)
To reduce the exposure to risk, a lender needs to believe that the odds of you repaying your loan are acceptably high. As a result, most lenders will want to make sure that your business is financially sound and has a strong credit profile. Your lender may want to ensure that you have a little skin in the game personally as well.
Why Do You Need a Personal Guarantee for a Business Loan?
Common Business Loan Requirements
If you apply for a business loan, the lender will likely begin by reviewing your business’ financial records to assess your ability to pay. Those records might include tax returns, bank statements, and other financial statements.
Your personal and business credit reports and scores will likely be reviewed as well.
Assuming you can satisfy all the lender’s initial loan requirements, one more concession may be required from you before your business can be approved for a loan — a personal guarantee.
What Is a Personal Guarantee?
Depending upon the type of business you establish, you may be protected from personal liability for most of your company’s debts. If you sign a personal guarantee for your business, however, that changes things. You could be personally on the hook in the event your business doesn’t pay its bills.
From a lender’s viewpoint, issuing credit to businesses can be risky. This is especially true of new business or those without strong business credit profiles. If the business fails, the lender could be stuck without any way to recollect the money it loaned out.
The personal guarantee provides an added layer of protection for business lenders. It solidifies to the lender that you have a long-term commitment to making your business a success.
When you sign a personal guarantee, you are essentially a co-signer on the loan. You agree to be held liable on a personal level for your business’ financial obligation. In the event of a default, the lender may be able to go after your personal assets (your home, your vehicles, your bank accounts, etc.) in order to satisfy the unpaid debt.
Do All Business Lenders Require Personal Guarantees?
Personal guarantees are very common in the business lending world. They aren’t, however, an agreement which all lenders and vendors automatically require. That’s a myth.
Nonetheless, if your business is young, has weak credit, or doesn’t have many assets, a personal guarantee is likely to be required.
Here are a few situations where you might be asked for a personal guarantee for your business:
- You fill out a business credit card application.
- You apply for a business loan or line of credit.
- You apply for a Small Business Administration (SBA) loan.
- You apply for a commercial real estate loan.
- You seek a new equipment lease.
- You apply to lease new office or retail space.
How to Avoid Personal Guarantees
Securing a business loan without a personal guarantee may be a long shot, but it’s not impossible. Here are a few tips which might help.
- Build stronger business credit.
The stronger your business credit reports and scores, the better position your company will be in whenever you need to seek commercial credit. Not sure where you stand? You can check your business credit scores for free with Nav.
- See if the vendor or lender is willing to negotiate.
If a vendor or lender asks you for a personal guarantee, see if they are willing to negotiate. You might be able to convince a manager to waive the requirement if you ask, especially if your business credit history is in good shape.
Being willing to make some concessions might help your case. You could offer to put more money down, provide other collateral, accept a higher rate, or borrow a lower amount. Even if the personal guarantee cannot be waived, there’s a chance that you could negotiate limitations to the guarantee instead.
- Search for vendors or lenders willing extend business credit without a personal guarantee.
Personal guarantees are the norm in the in the world of business financing, but you still have other options for you to consider.
You might be charged higher interest rates or be required to provide more collateral to qualify for such loans. Yet if you’re vehemently against personal guarantees, it might be worth paying higher costs to get a loan which involves less personal risk.
If you’re searching for business loans without a personal guarantee requirement, here’s a guide from Nav to help you get started.
Should You Sign a Personal Guarantee?
Agreeing to accept liability for your company’s debts is a personal decision which only you can make. If you wish to seek financing when your business is still young, a personal guarantee may be something you need to get comfortable with.
Yet before you sign on the dotted line, you should exercise caution. Figure out how much personal risk you are comfortable accepting on behalf of your business.
No one expects their business to fail, but it can happen even to the smartest and most experienced entrepreneurs. If your business collapses and you’re personally liable for any company debts, the consequences of those promises you made can be expensive.
This article was originally written on January 9, 2019 and updated on January 27, 2021.