What is a personal guarantee on an unsecured business loan?

If you’re trying to raise finance for your business through an unsecured business loan, your lender may ask you to sign a personal guarantee. But what does a ‘personal guarantee’ mean, why are they so common and, if you do sign, how does it affect you?

What is a personal guarantee?

Signing a personal guarantee means that you’re held personally responsible for paying some or all of a business’ debt if the business can’t, either through cash or personal assets like cars, stock and home equity.

Different kinds of personal guarantee

There’s more than one type of personal guarantee. Each structure is defined by how much of the business a guarantor is liable for and who else is a guarantor, if anyone.

• Unlimited. This means a guarantor must pay the entire loan, along with any legal fees. It’s the least risky option for the lender and the most risky for an owner.
• Limited. This means there’s a cap on the total amount that can be recouped from a guarantor personally. This is usually a fixed percentage or dollar amount.
• Several. This means that several people are responsible for a fixed percentage of the debt. This is common for multiple owners.
• Joint and several. This means that several people are responsible individually for paying off the entirety of the debt. Each individual person could be held accountable for the entirety of the debt.

What are the pros and cons of a personal guarantee?

This can sound a little scary, but the reality is that personal guarantees are a common part of business finance and are well-established ways for a lender to become comfortable financing a business that might not have a long history or that may have had historical credit issues.

That said, there are a few risks you need to be aware of too. Here’s a breakdown:

Pros

• Increased approval chances. If you provide a personal guarantee, you lessen the risk for the lender. This makes them more likely to approve you for an unsecured business loan.
• More competitive rates. If you’re already likely to get approved, a personal guarantee could give you access to lower interest rates.
• Capital without collateral. Small businesses and start-ups often don’t have the assets or income to apply for a regular secured loan. The personal guarantee offers an alternative way of securing finance without needing business assets. Very useful if you’re just getting started.

Cons

• Higher personal risk. If things don’t go well for the business and you’re a guarantor, you may need to contribute your own wealth to top up the business debt.
• Tough to restructure. If you want to sell your business later down the line, it can sometimes be tough to rearrange a personal guarantee to accommodate the change in ownership.
• Emphasis on personal credit. If your personal wealth becomes part of the equation, bad credit on your part could make a personal loan harder to get. Read our guide to personal credit scores if that’s a concern.

Are there alternatives to a personal guarantee?

If you’re not keen to sign a personal guarantee for an unsecured business loan, there are other options to raise finance for your business, including:

• Secured business loans
• Merchant cash advances
• Invoice factoring
• Investment capital
• And many more.

But just like a personal guarantee, each of these options will have their pros and cons and some may not be viable for your business structure, type or idea.

For more information on your options, make sure you speak to a specialist in business loans and capital raising before you make a decision.