A personal guarantee is an agreement by a member of a company to pay back a company loan to a bank or other lender in case the company defaults. At times, small businesses may decide to expand or purchase equipment or products for their business. If that business does not have the money to purchase these items on their own, members of the business may go to a bank or other lender for a loan. Often times, as a condition of the loan, a lender will ask a member or members for a personal guarantee. This guarantee requires the guarantor(s) to pay off the loan in case the business cannot.
In order to secure their interests in a loan, a lender may ask a person involved in the business, usually one or several owners or members of the board, to sign a personal guarantee. This guarantee allows the lender to pursue the guarantor personally if the business does not pay back the loan. Personal guarantees not only show a lender that a person is serious about the business, but also can show them that the individual is serious about paying back the loan. In addition, it also is an incentive for the guarantor to work hard at making the business succeed so it can repay the loan. Should the business default for any reason, the lender can go through the proper channels and confiscate personal items such as houses or cars.
Many people may think a personal guarantee is a reasonable risk because they are certain their business will be successful. In addition, it may be the only way for a person to obtain a loan from a particular lender. With the money in hand, the business can purchase land to expand their business, equipment to make the business run more efficiently, or other items necessary for the course of their business affairs. A lender may like such a guarantee because it makes it more likely that an individual will do what it takes to pay back the loan. The lender may also feel as if he is in a better position to receive payment for the money because he is legally allowed to pursue the guarantor’s high value assets if the business defaults on the loan.
The risk with signing a personal guarantee is mostly on the person signing the guarantee. Should the business fail despite the guarantor’s best efforts, he could lose his personal assets, such as a home or savings. In order to avoid this, some business owners looking for a loan will try and negotiate away the guarantee. Some lenders are willing to do this, especially for a business that is successful. Others may not. In some cases, a person may not be able to avoid signing a guarantee so the risk should be taken with caution, and the pros and cons of the guarantee thoroughly weighed.