What is a personal guarantee, and should I sign one?
Sterling's answer It's your promise to pay the business's debt from your own pocket if the business can't. Expect to be asked for one, so the job isn't avoiding it, it's knowing exactly what you're on the hook for.
Want a straight answer for your business?
See who'll fund meA personal guarantee is a promise, signed by you as an individual, that you'll pay the business's debt if the business doesn't. It moves the risk from the company to you. If the business defaults, the funder can come after you personally, which is why it matters far more than the interest rate when things go wrong.
Why funders ask for one
A small business can close, sell its assets or simply run out of cash. The funder wants someone who can't disappear with the company. Your personal guarantee also gives you a reason to keep paying through a bad patch, which is exactly what the funder is buying.
It's also why your personal credit gets checked on a business application. The funder is assessing the guarantor as well as the business. A hard inquiry can lower your score slightly; a soft one doesn't.
What the SBA requires
SBA loans have a rule set in federal regulation: holders of at least a 20% ownership interest generally must sign a personal guarantee for the loan. So if you own 25% and your partner owns 75%, both of you can expect to sign.
Limited vs unlimited
| Type | What you owe if the business defaults |
|---|---|
| Unlimited personal guarantee | The whole debt, plus interest, fees and collection costs |
| Limited personal guarantee (capped amount) | Up to a fixed dollar figure |
| Limited personal guarantee (percentage) | A set share of the debt |
| Performance or "bad acts" guaranty | Only triggered by specific conduct, such as diverting sales or giving false information |
Ask which one you're being offered. Ask for the softer versions. Some funders will agree to a cap, especially if there's other security.
The worked number
Your business borrows $100,000 at 18% APR over 24 months: $4,992.41 a month. Twelve months in, the business fails with roughly half the balance unpaid.
- With an unlimited personal guarantee, you're personally liable for the full outstanding amount, plus any default interest and legal costs the contract allows.
- With a limited personal guarantee capped at $25,000, your personal exposure stops at $25,000.
Same loan, very different worst case.
Sterling's take: price the deal on the rate, but sign it on the personal guarantee. That's the clause that follows you home.
What to check before you sign
- Is it limited or unlimited? If limited, what's the cap?
- What triggers it: any missed payment, or only specific bad acts?
- Does it survive if you sell your shares or leave the business?
- Are spouses asked to sign? Push back if they're not owners.
- Is it paired with a confession of judgment? That combination can let a funder move very fast against you.
- Will the funder release you when the debt is paid? Get that in writing.
What to do next
Read the personal guarantee section before you compare prices, and if the amount is significant, have a business attorney read it with you. If you're weighing secured options, do I need collateral explains how other security can reduce what a funder asks of you personally.
Ready for a straight answer?
Two minutes of questions. One funding specialist. No impact on your credit score.
Questions owners ask
Does a personal guarantee put my house at risk?
It can. If the business defaults and the funder wins a judgment against you, it may be able to pursue personal assets, subject to your state's protections. That's why the size and limits matter.
What's the difference between a limited and an unlimited personal guarantee?
A limited personal guarantee caps what you can owe, as a dollar amount or a percentage. An unlimited one covers the whole debt plus costs.
Do all owners have to sign?
It depends on the funder. For SBA loans, owners holding 20% or more generally must sign. Other funders set their own rules.
Is a personal guarantee on a cash advance different?
Advance contracts sometimes frame it as a guaranty of performance, covering things like not diverting sales or closing the business on purpose. Read what triggers it, because it varies by contract.