Understanding Personal Guarantees: A Brief Overview

06.26.2025

Author:  Attorney Thomas J. Casey

What is a Personal Guarantee?

A personal guarantee is a legal commitment made by an individual to repay a loan or debt if the primary borrower defaults.  This is often required by lenders when dealing with small businesses or startups that may not have a long credit history or substantial assets.  Also, personal guarantees are commonly required on leases by students, with parents being asked to sign.

Why Are Personal Guarantees Important?

  1. Access to Credit: For many small business owners, personal guarantees can be the key to securing financing.  Lenders are more willing to extend credit when they have the assurance that the loan will be repaid, even if the business fails.  Landlords are more willing to rent to tenants without a substantial income if a guarantor is available.
  2. Lower Interest Rates: By providing a personal guarantee, borrowers may be able to negotiate lower interest rates, as the lender’s risk is reduced.
  3. Demonstrates Commitment: Offering a personal guarantee shows lenders that the borrower is committed to the success of the business and is willing to take personal responsibility for its debts.

Risks Involved

  1. Personal Liability: The most significant risk is personal liability.  If the business cannot repay the loan, the guarantor is personally responsible for the debt.  This can affect personal assets, including savings, property, and other investments.
  2. Credit Score Impact: Default on a loan with a personal guarantee can negatively impact the guarantor’s credit score, making it more difficult to obtain personal or business credit in the future.
  3. Legal Consequences: In extreme cases, failure to honor a personal guarantee can lead to legal action, including lawsuits and judgments against the guarantor.

Tips for Managing Personal Guarantees

  1. Understand the Terms: Before signing a personal guarantee, it is crucial to understand the terms and conditions.  Know what you are agreeing to and the extent of your liability.
  2. Negotiate Limits: Try to negotiate limits on the guarantee, such as a cap on the amount or a time limit on the guarantee’s validity.
  3. Seek Legal Advice: Consult with a legal professional to ensure you fully understand the implications of the personal guarantee and to explore any possible protections.

Conclusion

Personal guarantees can be a valuable tool for securing business financing, but they come with significant risks.  It is essential to weigh the benefits against the potential downsides and to take steps to protect yourself as much as possible.  By understanding the terms and seeking professional advice, you can make informed decisions that support your business goals while safeguarding your personal financial health.

Feel free to ask if you have any specific questions or need further details on any aspect of personal guarantees!