# Understanding Personal Guarantee: Definition, Role, and Impact on Business Loans

## What Is a Personal Guarantee?

A personal guarantee is a promise that an individual will repay [credit](https://www.investopedia.com/terms/c/credit.asp) issued to a business they lead or partner in. A personal guarantee means if the business can't repay its [debt](https://www.investopedia.com/terms/d/debt.asp), the individual has to cover the balance personally. Personal guarantees offer extra protection to creditors who want assurance of repayment.

### Key Takeaways

*   Personal guarantees are commonly required by lenders for new or small businesses that lack an established credit history to secure loans and credit.  
    
*   Business owners who provide personal guarantees use their personal assets as collateral, which increases their personal financial risk but may improve loan terms.  
    
*   There are two types of personal guarantees: limited guarantees, where the liability is restricted, and unlimited guarantees, where the principal is fully liable for the debt.  
    
*   The Small Business Administration requires personal guarantees from anyone with a 20% or greater interest in a business when applying for SBA loans.  
    
*   Personal guarantees give lenders a legal claim to an individual’s assets, which lessens the credit risk to lenders if a business defaults on its obligations.

## The Mechanics of Personal Guarantees

Personal guarantees are used in credit deals to secure funding for businesses. They are used by new and [small businesses](https://www.investopedia.com/small-business-4427743)—generally, for companies that may not be as established or for those with inadequate [credit history](https://www.investopedia.com/terms/c/credit-history.asp) to qualify for loans and other credit on their own. When a personal guarantee is given, the principals of the company pledge their own assets and agree to repay a debt from personal capital in case the company defaults. In short, the business owner or principal becomes a [cosigner](https://www.investopedia.com/terms/c/co_sign.asp) on the credit application.

Here's how it works. Lenders may require business owners or executives to provide a personal guarantee in order to access credit if the company is too new or has a bad credit history. The business [principal](https://www.investopedia.com/terms/p/principal.asp) includes their own credit history and profile as part of the credit application which forms the primary basis for underwriting. When a personal guarantee is used, the applicant includes their Social Security Number (SSN) for a hard credit inquiry as well as details about the individual’s personal income. This information is in addition to the company's [employer identification number](https://www.investopedia.com/terms/e/employer-identification-number.asp) (EIN) and financial statements.

An executive may also pledge their own personal [assets](https://www.investopedia.com/terms/a/asset.asp)—checking accounts, savings accounts, cars, and real estate—and agree to repay a debt from personal capital in case the company [defaults](https://www.investopedia.com/terms/d/default2.asp) as part of their personal guarantee. Not only does this make credit more accessible to businesses, but it also mitigates the [risk](https://www.investopedia.com/terms/r/risk.asp) to creditors since they have a legal claim to the individual's personal assets. It also improves the terms which will be based on the profile of both the business and the individual in the [underwriting](https://www.investopedia.com/terms/u/underwriting.asp) process.

Small business owners and executives normally make a substantial initial investment using their own [capital](https://www.investopedia.com/terms/c/capital.asp). That's one of the reasons why they offer personal guarantees to get credit—because they have a vested interest in the launch and development of their businesses. As such, businesses may be required to pay creditors monthly installment payments rather than generating a return for [equity](https://www.investopedia.com/terms/e/equity.asp) investors.

## Important Factors in Personal Guarantees

Well-established businesses with strong credit can often get [loans](https://www.investopedia.com/terms/c/commercial-credit.asp) without personal guarantees, but they might still choose to include them. A personal guarantee can make credit less expensive for a business.But if the business isn't able to generate enough [revenue](https://www.investopedia.com/terms/r/revenue.asp) and earnings, an individual could suffer significant losses. If a personal guarantee is in place and the business defaults, the principal is personally [liable](https://www.investopedia.com/terms/l/liability.asp). It gives creditors a legal right to all of an individual's pledged personal assets.

The _New York Times_ report on former President Trump's taxes indicates that he took this route, personally guaranteeing "loans and other debts totaling $421 million" by 2018. This provided a benefit, as well—taking responsibility enables a business owner to use those losses to offset current and future taxes they owe.

Having said this, business owners should be especially careful when they apply for credit as terms may require a personal guarantee. Applicants should look for language in the [credit application](https://www.investopedia.com/terms/c/credit-application.asp) such as “you, as an individual and the authorizing officer of the company...are agreeing to be jointly and severally liable with the company for all charges to the account.”

### Personal Guarantees in SBA Loans

Many private lenders require personal guarantees before they advance any credit to certain types of businesses. What many people may not realize is that the [Small Business Administration](https://www.investopedia.com/terms/s/small-business-administration.asp) (SBA) also requires principals to offer personal guarantees in order to get an SBA loan. Anyone with an interest in a business of 20% or more must provide the SBA with an unconditional personal guarantee. These loans are backed by the SBA but are issued by the administration's lending partners.

> **Important**
>
> The Small Business Administration requires a personal guarantee from anyone with an interest of 20% or more in a company.

## Exploring Types of Personal Guarantees

There are two common types of personal guarantees—limited and unlimited. Limited guarantees allow lenders to collect a certain amount of money or a certain percentage of the outstanding balance from a principal or business owner. These guarantees are common when there are multiple principals who can pay a certain portion of the debt. For instance, if a business defaults on its loan, the [lender](https://www.investopedia.com/terms/l/lender.asp) can go after each principal for 25% of the balance.

Unlimited guarantees, however, require that the principal is liable for the full outstanding balance. Personal guarantees required by the SBA are considered unlimited guarantees. So if a business can't fulfill its obligations on a loan with a personal guarantee, the lender can go after the principal to recoup the full outstanding balance. If there aren't enough [liquid assets](https://www.investopedia.com/terms/l/liquidasset.asp) available—through checking and other, similar accounts—the lender can seize other assets such as [real estate](https://www.investopedia.com/terms/r/realestate.asp) or vehicles.

> **Article Sources**
>
> 1.  New York Times. "[Long-Concealed Records Show Trump's Chronic Losses and Years of Tax Avoidance](https://www.nytimes.com/interactive/2020/09/27/us/donald-trump-taxes.html?action=click&amp;module=Spotlight&amp;pgtype=Homepage)." Accessed Feb. 4, 2021.
>     
> 2.  SBA. "[Unconditional Guarantee](https://www.sba.gov/document/sba-form-148-unconditional-guarantee)." Accessed Jan. 29, 2020.