Building Your Business Business Financing What Is a Personal Guarantee for a Business Loan? Definition & Examples of a Personal Guarantee for a Business Loan By Jean Murray Updated on August 8, 2020 Photo: AZarubaika / Getty Images A personal guarantee for a business loan is a promise to be held individually responsible for the repayment of business debt. The person making a personal guarantee is usually an executive or business partner. This personal guarantee makes a potential lender feel more comfortable issuing a loan. Learn more about what personal guarantees for a business loan are, and how they're used by lenders to secure loans. What Is a Personal Guarantee for a Business Loan? A personal guarantee is simply an agreement you sign, promising to pay back the loan personally if the business cannot pay. It's like you are the co-signer on the loan for your business. This binding agreement may be required by a lender, even if your business is not connected to you personally, such as with a corporation or limited liability company (LLC). If the corporation fails and cannot pay its bills, your personal guarantee can be activated by the lender. A personal guarantee may be secured by personal assets, like the owner's home equity, or it may be unsecured, based only on the good faith assurances of the borrower. Either way, the person guaranteeing the loan can be held liable for outstanding debt that the business cannot repay. Note Individuals who own 20% or more of a small business seeking a Small Business Administration (SBA) loan must provide an unlimited personal guarantee. How Does a Personal Guarantee for a Business Loan Work? Personal guarantees on business loans are most often required for new businesses that haven't yet acquired the assets needed to secure a loan. Starting a small business is a risky proposition, and a small business start-up loan is one of the riskiest loans a bank can give. That's why they require a personal guarantee. The bank wants you to have a financial stake in the success of the business, and they want you to understand you can't just walk away from the business if it fails—leaving the bank holding the bag. Note A lender will let you know whether or not you need a personal guarantee during the application process. If you're seeking an SBA loan, you should expect to provide a personal guarantee. Even if you don't have any personal assets, you may still be required to sign a personal guarantee document, though the document will be for an unsecured guarantee. If you do have assets, like equity in a home, you will probably have to pledge them and agree to use them to pay back the loan if your business cannot pay it (this is also known as a secured personal guarantee). If you find a co-signer, this person must be prepared to pledge assets against the loan. You would likely only need a co-signer if your personal assets are not enough to secure the loan, so the co-signer will need to have enough assets to secure the loan. If you don't yet have any business collateral to pledge, and you don't have any significant personal assets to pledge, there is a good chance you will not get the loan. Personal Guarantees Revoke Some Business Structure Protections You may be able to benefit from setting up your business as a limited liability company (LLC) or S corporation. Under most circumstances, one of these entities might protect other personal assets from being consumed by the business's liability. However, if you have signed a personal guarantee, don't expect to hide behind a business structure when it comes to paying off your bank loan. Your personal guarantee will supersede other business structure protections. Check with your tax and financial advisers before making a decision about business type. Key Takeaways A personal guarantee on a business loan is when someone (usually an executive or business partner) allows themself to take on personal liability for a loan on behalf of a business.These personal guarantees are most common when the business doesn't have enough assets to secure the loan, such as in cases of new business startups.Those seeking a Small Business Administration loan should expect to sign a personal guarantee—they're required of all individuals who own at least 20% of a business seeking an SBA loan.Personal guarantees on business loans remove some of the protections that business structures like LLCs and S corporations provide for a business owner's assets. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Small Business Administration. "Unconditional Guarantee." Accessed Aug. 8, 2020.