What Is a Personal Guarantee?

A personal guarantee is a legally binding promise made by an individual. Should the promise be reneged on, legal action can be taken against the guarantor. For this reason, care must be taken before making a personal guarantee in order to avoid legal repercussions down the road. Personal guarantees are most commonly used in relation to debts and loans for businesses and other organizations.

Personal Guarantee on a Loan

So, what is a personal guarantee on a loan? Well, personal guarantees are most often used in business loans. This is because a small business or start-up does not usually have the credit history required to secure a loan from a large lender. It may also be required for an existing business that has a poor credit score. The personal guarantee allows for an individual to promise to repay the loan themselves if the business fails to do so. This ensures the lender will still be made whole should the business fail. In many instances, a personal guarantee is the only way for a new business to receive the loan they need to get started. 

How a Personal Guarantee Works

There are many aspects of personal guarantees that you should be aware of before entering into one. This includes: 

• Extends Liability: Unlike collateralized loans, where repayment is tied to specific business assets, a personal guarantee makes the guarantor personally responsible for the debt, extending liability to their entire financial portfolio.
• Impacts Personal Assets: If the business defaults, the lender can pursue the guarantor’s personal assets to recover the outstanding debt. This can include savings, real estate (like a home or rental unit), vehicles, and even retirement accounts. 
• Required for many loans: Personal guarantees are common for business loans, particularly SBA loans and traditional term loans. Lenders will often require personal guarantees from all stakeholders and business partners owning at least 20% of the business.
• Risks involved: Signing a personal guarantee involves significant risks, including potential loss of personal assets and damage to credit scores. It should be noted that this does not mean just the business’s credit score, but the personal credit score of the guarantor. 
• Potential benefits: Despite the risks, providing a personal guarantee can help businesses, especially new ones or those with limited credit, secure loans they might otherwise not qualify for. It can also sometimes lead to more favorable loan terms, such as lower interest rates. 

As you can see, a personal guarantee comes with both risks and benefits. It is extremely important that you consider all of the above before entering into a personal guarantee. 

Personal Guarantee Loopholes

There are a number of things that can negate the enforceability of a personal guarantee. While none of these are automatic, they can be used to argue against a personal guarantee in court. These loopholes include: 

• The guarantee not being in writing.
• The guarantee not being signed by the guarantor personally.
• Fraud or misrepresentation by the creditor when drafting the personal guarantee.
• Terms that are overly unfair.
• Changes to loan terms without the consent of the guarantor.
• Duress or undue influence being used when signing the guarantee.
• Ambiguity in the wording of the guarantee.

It should also be noted that there are conditions that can be placed in a personal guarantee that some may consider loopholes. For example, a limit placed on the amount or duration of the guarantee. Additionally, a performance-based release can be negotiated, where the guarantee terminates if the business reaches certain financial goals. These loopholes can ensure that a guarantor is not tied to the business’s debt forever.

Do Personal Guarantees Hold Up in Court?

In many cases, personal guarantees do hold up in court. Lenders have a lot of experience with personal guarantees, meaning that they usually know how to write them in a way that ensures they are legally enforceable. However, as mentioned above, there are ways to argue against a personal guarantee in court. Should you choose to fight a personal guarantee in court, it is important that you hire a personal guarantee attorney that is well-versed in this area of the law. 

What Are the Risks of a Personal Guarantee?

There are many risks associated with personal guarantees. First, is the personal liability. As a guarantor, you become personally responsible for the business’s debt. This means that should the business be unable to pay their debt, your personal assets, including savings, real estate (home, other properties), vehicles, and potentially retirement accounts, could be seized. 

You must also consider the risk to your personal credit score. A default on the loan could lower your personal credit score. This would make it more difficult for you to obtain personal loans, mortgages, or business financing in the future. 

As you can see, making a personal guarantee can wreak havoc on your financial life. For many, it leaves them with no option but to declare bankruptcy. Due to this, careful consideration must be given before becoming a guarantor. You should ensure that the terms of the loan are favorable and that it is likely the business will be able to make their loan payments and not default on the loan.