What is a personal guarantee and how does it work?

A personal guarantee is an individual's legal promise to repay credit extended to their business if the business itself is unable to pay. You're essentially co-signing the loan on behalf of your company, making yourself personally responsible for the debt.

If your company defaults on a loan or any other obligation, the lender can demand payment from your personal funds. They can come after your savings, your home, your investments, and any other personal assets you own. This commitment extends to all types of obligations, including loans, business lines of credit, and leases. It doesn't matter what type of business structure you have.

Even if your business is an LLC or corporation designed to shield you from liability, a signed personal guarantee bypasses that corporate protection entirely. The limited liability you thought you had disappears the moment you sign that guarantee. Your personal assets become collateral for the business debt, whether you intended that or not.

Lenders view startups and small businesses as high-risk borrowers. Most lack significant credit history or substantial assets. A personal guarantee gives the lender legal recourse to the owner's personal assets if the business fails to pay. It's extra insurance for them.

For many new businesses, borrowing without a personal guarantee is nearly impossible. The company itself has no credit record. It has minimal collateral to offer. The business exists mostly as an idea and some early revenue. That's not enough security for most lenders. Even the US Small Business Administration requires personal guarantees on its loans. Any owner with 20% or more stake must sign an unconditional personal guarantee for an SBA-backed loan.

Requiring a guarantee also aligns the business owner's interests with the loan obligation. It ensures you have skin in the game. Lenders know that owners who personally guarantee loans work harder to avoid default. This alignment can make approval easier or lead to better interest rates. From the lender's perspective, these requirements are standard risk management practices in business lending.

Personal guarantees appear in nearly every credit arrangement for small or young businesses. Here are the most common scenarios where you'll encounter them.

Bank loans and lines of credit

Almost all traditional business loans for small companies include a personal guarantee clause if the business lacks substantial assets or credit history. Banks want that extra layer of protection before lending to unproven businesses.

Business credit cards

Most business credit cards are issued to the owner personally with the business name attached. They require a personal guarantee, meaning you must pay the balance if the business can't. The card might say your business name on it, but the liability rests squarely with you.

SBA loans

SBA 7(a) and 504 loans mandate personal guarantees from significant owners. This requirement is non-negotiable. If you own 20% or more of the business, you're signing that guarantee.

Equipment financing and leases

Equipment loans or leases often have personal guarantee provisions, especially for new companies. Lenders want to ensure they can recover the debt if payments stop, and the equipment value alone might not cover the outstanding balance.

Commercial real estate leases

Landlords frequently insist on a personal guarantee for office or retail space leases when renting to a new small business. They want assurance that rent obligations will be met even if the company fails.

Vendor contracts and credit lines with suppliers

If a supplier extends credit to a fledgling business, such as net-30 payment terms, they might include a personal guarantee in the credit application. They're protecting themselves against unpaid invoices.

Yes, it can. When you sign a personal guarantee, the lender often checks your personal credit during underwriting. This results in a credit inquiry on your report. If the business fails to pay and you're called upon to pay personally, that default will be reported on your personal credit record.

The impact varies depending on how things play out. If the loan is repaid on time, it might not significantly affect your personal credit. Some loans won't show on personal credit reports unless there's a default. But if you default on a personally guaranteed loan, it will damage your credit just as a default on any personal loan would. The key point is simple. Business failure can become a personal credit disaster when guarantees are involved.

Not all personal guarantees are identical. The obligations can be structured in various ways, and each structure creates different levels of risk. The type of guarantee you sign determines exactly how much personal exposure you face if your business fails.

Unlimited personal guarantee

An unlimited or unconditional guarantee holds you 100% liable for the entire debt if the business defaults. There's no cap on the amount. The lender can pursue the full outstanding balance plus any interest or collection costs from you personally.

If your business defaults owing $100,000, you must repay all $100,000 from personal assets. You might owe even more when legal fees and collection costs get added. SBA-required guarantees are typically unlimited, which makes them particularly risky for business owners.

Limited personal guarantee

A limited guarantee caps your liability to a certain amount or percentage of the loan. This structure is common when multiple co-owners each guarantee a portion of the debt. Three partners might each guarantee up to 33% of a loan, for example.

The limitation might be a dollar amount or a proportional share. These limits must be clearly specified in the contract. However, even limited guarantees carry significant risk. You're still fully on the hook up to the limit specified, which could be substantial.

Joint and several liability

Many guarantees are written on a "joint and several" basis when multiple guarantors are involved. This means each guarantor can be held responsible for the entire debt, not just their share. Creditors can choose to collect 100% of the debt from any one guarantor who has the means to pay.

Without a limit tied to ownership percentage, even a minority owner could end up owing the full amount if others can't pay. You might own just 25% of the business but be forced to repay 100% of the debt. You'd then have to pursue your partners separately for their shares.

Continuing guarantees

Some guarantee agreements are continuing or open-ended. They cover not only the current loan but any future credit extended by the lender until the guarantee is explicitly revoked. You might sign for a $50,000 loan and later discover you're also liable for an additional $100,000 credit line the business took out.

Watch for and be wary of “continuing guarantee” language that could extend your personal liability to future borrowings beyond the initial loan. These provisions can create unlimited future exposure you never anticipated.

“Bad boy” carve-outs

In certain contracts, especially those involving real estate or large loans, a guarantee may be conditional. It remains inactive unless the borrower commits fraud or other “bad acts.” These clauses mean you aren't personally liable unless the default involves specific wrongful behaviors like fraud or misuse of funds.

While this sounds like protection, the definition of “bad acts” can be broad. Missing a tax payment or failing to maintain insurance might trigger full personal liability. Read these provisions carefully.

Personal guarantees are standard for small business financing, but they can sometimes be negotiated or even avoided. If your business is well-established or has strong collateral, you might persuade a lender to waive the personal guarantee requirement. The key is having something else to offer that makes the lender comfortable with their risk.

Offering other security can give the lender enough comfort to forgo a full personal guarantee. You might pledge business assets, make a larger down payment, or provide a letter of credit. Some lenders will accept a limited personal guarantee instead, which caps your liability at a certain dollar amount or percentage of the loan. This at least reduces your exposure compared to unlimited liability.

You can also negotiate which personal assets are on the line. Request carve-outs that exclude certain assets, like your primary residence, from the guarantee. Some guarantees might “burn off" or release after a period of timely payments. If your business performs well and meets certain conditions, the guarantee could be lifted after a few years. Talk to your lender about these options before signing. While not every lender will agree, minimizing personal risk is always worth pursuing. Larger or venture-backed companies often avoid personal guarantees altogether, but a typical small business owner will need to offer something in return to get a similar concession.

Signing a personal guarantee puts your own finances at risk if your business can't meet its obligations. Once a personal guarantee is in effect, a default by the business allows the creditor to come after your personal assets. The lender's legal claim extends to everything you have personally, not just what you invested in the business.

Personal credit damage

If the business fails to repay, your personal credit score will suffer. The debt and any collection actions can be reported on your personal credit reports. Meanwhile, the business's credit is also damaged, creating double jeopardy for you as the entrepreneur.

This credit damage follows you long after the business closes. Future lenders will see the default when you apply for personal loans, mortgages, or even apartment rentals. Rebuilding that credit takes years.

Legal action and judgments

The lender can pursue legal action against you individually. This can result in judgments that lead to liens on personal property or garnishment of personal wages until the debt is satisfied. Court proceedings become public record, potentially damaging your professional reputation.

These legal battles are expensive, even if you eventually win. Attorney fees, court costs, and lost work time add up quickly. Most business owners find themselves settling just to avoid prolonged litigation.

Asset seizure

Any collateral pledged can be seized. If you put up your home or a piece of real estate as part of the guarantee, that property could be foreclosed or forced to sell to pay the debt. Even assets not specifically pledged become targets if the lender gets a judgment.

Bank accounts can be frozen. Investment portfolios can be liquidated. That boat or vacation property you thought was safe isn't. Lenders will pursue whatever assets they can legally reach to satisfy the debt.

Personal bankruptcy risk

In extreme cases, an owner who cannot pay a large personally guaranteed debt might face personal bankruptcy to discharge the obligation. Even bankruptcy might not fully protect certain assets. Some personal guarantees, particularly those involving fraudulent or intentional defaults under “bad act” clauses, could survive bankruptcy proceedings.

Personal bankruptcy affects every aspect of your financial life for seven to ten years. It limits your ability to obtain credit, start another business, or even get certain jobs. In short, you could face significant personal loss if your business goes under and you've guaranteed its debts.

Lenders typically require all major owners of a small business to sign the personal guarantee, not just the primary founder. The US Small Business Administration mandates an unlimited personal guarantee from any owner with at least a 20% stake in the company. If you have business partners or co-founders, each of them will likely need to guarantee the loan as well.

Some loan contracts divide the liability among multiple guarantors. Three co-owners might each guarantee 33% of the debt. But often each person is still potentially liable for the entire amount if others don't pay. This means even if you only own 30% of the business, you could be forced to repay 100% of the loan if your partners can't cover their shares.

Lenders may also ask a business owner's spouse to sign the guarantee in certain cases. This usually happens when personal assets or finances are jointly held. By having your spouse co-sign, the lender ensures it can reach jointly owned property or accounts if the guarantee is enforced. Any co-owner who is critical to the business or has rights to key assets will likely need to sign.

Giving a personal guarantee is often the only way to secure financing for a young business. You can't always avoid them entirely. But you can and should negotiate terms to reduce your liability and protect your personal assets as much as possible.

Negotiate a limited guarantee

If multiple owners are involved, push for your personal guarantee to be proportional to your ownership or a fixed amount. Avoid joint-and-several liability for the full debt. This prevents a scenario where one partner shoulders the entire burden.

Make your case based on fairness and ownership percentages. If you own 30% of the business, argue that your guarantee should be capped at 30% of the debt. Get this limitation in writing before signing anything.

Set triggers or end dates

Request terms that limit when the guarantee kicks in or how long it lasts. Stipulate that the personal guarantee is enforceable only after the business misses a certain number of payments. Or negotiate for it to be released once the loan balance falls below a certain threshold or after a set time of on-time payments.

Avoid “continuing guarantees” that extend indefinitely. Ensure the guarantee is tied only to the specific loan or lease at hand. A guarantee that automatically expires after two years of perfect payment history gives you a clear exit path.

Carve out key assets

Try to exclude certain personal assets from the guarantee. Some lenders may agree in writing that your primary residence or retirement accounts are off-limits. State laws, such as homestead protections, may automatically shield a portion of home equity or other assets.

Use these existing protections in negotiations. If your state protects $500,000 in home equity, make sure the lender acknowledges this in the guarantee agreement. Every asset you can exclude reduces your risk.

Reduction over time

Ask if the guarantee can be scaled down as the business grows and demonstrates creditworthiness. After a year of timely payments, the guarantee amount could drop. Once the firm meets specific financial ratios, it might be removed entirely.

Build these milestones into the original agreement. Lenders are more likely to agree to future reductions when they're negotiated upfront rather than requested later. Define clear metrics that trigger guarantee reductions.

Consider higher costs for no guarantee

Some lenders might offer a loan with no personal guarantee required if you accept other trade-offs. These might include a higher interest rate or providing additional collateral. An extra percentage point of interest might be worth avoiding personal liability entirely.

Weigh the cost of paying more versus the benefit of protecting personal assets. Sometimes paying an extra $10,000 in interest over the loan's life is smarter than risking your $500,000 home.

Legal review

Always have an attorney review any personal guarantee agreement. They can spot onerous clauses like overly broad “default” definitions or hidden “joint and several” language. Legal counsel can also help negotiate terms to better safeguard your personal interests before you sign.

The few hundred dollars spent on legal review could save you hundreds of thousands later. Your attorney might find provisions you missed that significantly increase your exposure. They can also suggest alternative language that provides the lender security while protecting you better.

If your business defaults on the loan, the personal guarantee kicks in immediately. You become responsible for paying off the debt. The lender will notify you and demand payment from you personally, treating you as if you were the borrower all along.

If you can't immediately cover the missed payments or balance, the situation escalates quickly. The lender may file a lawsuit against you. If they win a judgment in court, they gain stronger powers to collect. The creditor can then move to seize your personal assets to satisfy the debt. This includes withdrawing funds from your bank accounts, placing liens on your real estate, or claiming other valuable personal property to cover what's owed.

A business default can lead to personal financial ruin when you've signed a guarantee. You could lose personal savings or property to repay the loan. A serious default will hurt your personal credit score since many lenders report the default under your name due to the guarantee. It might even force you into personal bankruptcy if the debt is overwhelming. Only sign a personal guarantee if you're confident in the business's ability to repay. Have a contingency plan ready in case things go wrong.

While personal guarantees are common, they're not absolutely unavoidable. Several financing options can help you avoid or minimize the need for a personal guarantee. Each alternative involves trade-offs, but they might align better with your risk tolerance.

Offer collateral instead

If a lender is primarily concerned about risk, providing specific collateral for the loan might satisfy them without a personal guarantee. Pledge business assets like equipment, inventory, or real estate owned by the business. A large cash security deposit can also sometimes remove the requirement for a personal guarantee.

Tangible collateral provides the lender with a means to recover funds without relying on your personal guarantee. The key is that the collateral value must be sufficient to cover the loan amount. This approach keeps the risk contained to business assets rather than exposing your personal wealth.

Use secured loans or credit products

Seek out financing that is explicitly secured by assets. Traditional secured business loans, equipment financing, or invoice factoring are backed by collateral. The purchased equipment or your accounts receivable serve as security, which may eliminate the need for an additional personal guarantee.

Always verify the terms though. Some secured loans still ask for guarantees, but many asset-based lenders rely purely on collateral value. The stronger the collateral, the less likely they'll require your personal guarantee.

Build business credit

Focus on growing your business's own creditworthiness for long-term success. Establish trade lines with suppliers and use business credit cards to build a payment history. Maintain strong financials and healthy cash flows. Document everything properly. As your business credit strengthens, you may eventually qualify for business credit cards with no personal guarantee, which evaluate your company's financials instead of your personal creditworthiness.

Over time, a mature business with good credit and consistent profits may qualify for loans without any personal guarantee. Many banks waive the requirement for well-established firms with strong track records. This takes time but creates the best long-term solution.

Seek alternative lenders

Some non-bank or online lenders advertise no personal guarantee on certain financing products. They might lend based on the strength of business cash flows alone. Revenue-based financing, for example, often doesn't require personal guarantees since repayment comes directly from sales.

Be cautious though. Such loans might come with higher interest rates or other fees. Always read the fine print to confirm no hidden personal liability. The convenience of avoiding a guarantee might cost significantly more in total financing charges.

Brex offers a corporate card that doesn't require a personal guarantee, making it one of the few options where business owners can obtain credit without putting personal assets at risk. Instead of evaluating your personal credit or requiring you to sign a guarantee, Brex underwrites based on your business's cash balance and financial health. This approach protects founders from personal liability while still providing access to business credit.

The card works differently from traditional business credit cards. Brex requires businesses to maintain a certain cash balance in their accounts and evaluates creditworthiness based on the company's bank statements, revenue, and burn rate. Startups and tech companies with venture funding often qualify easily, although the card is available to all types of businesses. Credit limits typically start at a percentage of your cash balance but can increase as your business grows.

Key features include no personal guarantee requirement, no personal credit check, higher credit limits than many traditional cards, and rewards tailored to business spending categories. The card offers points accelerators on software subscriptions, rideshare services, and travel expenses. It also includes expense management tools built into the platform, making it easier to track spending and manage employee cards. While Brex charges no annual fee, businesses must meet minimum balance requirements and demonstrate consistent cash flow to maintain access. For companies that qualify, it's a way to build business credit and manage expenses without founders risking their personal financial security.

Personal guarantees are a prevalent feature of small business financing. They offer lenders security but place entrepreneurs' personal wealth at stake. Nearly every small business owner will face the decision to sign one at some point.

The central advice is straightforward. Know what you're signing, negotiate terms when possible, and weigh the risks versus the rewards. Read every clause, get legal review, and push for limitations wherever you can. Never sign a personal guarantee without fully grasping what you're risking.

Personal guarantees can open doors to funding your business's growth, but they tie your personal fate to your company's success. By entering such agreements thoughtfully and with protections in place, you can safeguard your financial future while pursuing your entrepreneurial goals. The key is making informed decisions rather than desperate ones.

Consider starting with financial tools that don't require personal guarantees at all. Brex provides not just a corporate card without personal liability, but also startup business banking that keeps your finances organized, expense management software that tracks spending automatically, and accounting automation that saves hours of manual work. These integrated tools help you build strong financial foundations for your business while keeping your personal assets protected.

Andrew Choi, CEO of Ink AI says: “Brex is built for tech founders who want to move fast and not get bogged down in old-school banking BS. Their no-personal-guarantee cards, treasury management, and spend management tools let us focus on scaling, not paperwork. Every startup should be using Brex.”

Sign up for a Brex card today and grow your business without risking your personal financial security.