Personal Guarantee on a Business Loan: What You Are Risking and What to Negotiate

What is a personal guarantee on a business loan?

It is your personal promise to pay the business's debt if the business does not. If the company defaults, the lender can pursue you directly for the amount guaranteed: it can sue you, obtain a judgment and collect from your bank accounts, wages, investments and, depending on your state's exemptions, real estate. The limited liability you set up for the business does not protect you from a contract you signed personally.

Lenders ask for it because a small business's own assets are often thin, and because an owner who has personal money on the line is more likely to keep paying. For SBA 7(a) loans, federal rules (13 CFR 120.160(a)) require a guarantee from every person who owns 20% or more of the borrower, and SBA's lending procedures, which it revises periodically, can require guarantees from additional owners, for example in some partial changes of ownership. Outside SBA lending, the requirement is a matter of lender policy and negotiation.

Unlimited, limited, payment or collection: which guaranty are you signing?

The label at the top of the document matters less than the operative clauses, but these distinctions tell you how exposed you are.

Which clauses inside the guaranty matter most?

Guaranties use dense boilerplate, but a handful of clauses decide almost everything. Read these first:

• Amount: "all obligations now or hereafter owing" means unlimited and continuing. Look for a specific dollar cap instead.
• Joint and several liability: when several owners guarantee, each can be pursued for 100% of the debt, not just their ownership share.
• Waiver of defenses: you agree the lender can extend the loan, change the terms, release collateral or release other guarantors without your consent, and you stay liable.
• Waiver of notice and demand: the lender need not tell you before calling the guaranty.
• Survival: the guaranty continues after you sell your shares or leave the company unless the lender releases you in writing.
• Confession of judgment: some guaranties include one, allowing a judgment against you without a hearing.
• Attorney fees and governing law: you pay the lender’s collection costs, often in the lender’s home state.

Can a lender require your spouse to sign?

Usually not just because you are married. Under the Equal Credit Opportunity Act's Regulation B (12 CFR 1002.7(d)), a creditor generally cannot require a spouse's signature on a guarantee when the applicant qualifies on their own. A lender may require guarantees from owners, partners and officers based on their role in the business, but it may not require them only from married owners or automatically add spouses. There are exceptions, for example where the lender is relying on jointly owned property or the spouse's income to support the credit, so ask the lender to explain in writing why a spouse's signature is needed.

In community property states, a debt guaranteed by one spouse can still affect community assets, so a spouse's signature is not the only way family property becomes exposed. If you own a home jointly or live in a community property state, ask a lawyer how your state treats guaranties before you sign.

How do MCA guaranties differ from bank loan guaranties?

A merchant cash advance usually asks for a "performance guaranty." On paper, you guarantee only that the business will keep its promises: not divert receivables, not change bank accounts without consent, not close or sell the business without notice, and provide accurate information. If the business simply has slow sales and pays less through a working reconciliation process, the guaranty should not be triggered.

The catch is in the default list. If "default" includes a single returned debit, any other financing or a "material adverse change," a performance guaranty can become liability for the entire balance plus fees. Read the MCA's events of default alongside the guaranty, and ask for a sentence stating that reduced sales, or the business closing in the ordinary course after giving notice, is not a breach of the guaranty.

What happens to a personal guarantee if the business fails or files for bankruptcy?

The guarantee is a separate contract between you and the lender, so it survives the business closing, being sold for less than the debt, or going through bankruptcy. A bankruptcy filing by the business generally protects the business, not its guarantors: the automatic stay usually halts collection against the company, while the lender remains free to pursue the guarantor personally. Courts make exceptions only in limited circumstances, so plan on the guarantee being called if the business cannot pay.

If the lender sells collateral, such as equipment or inventory, the guarantee usually covers any shortfall between the sale proceeds and the balance, plus the costs of the sale. Many guaranties waive your right to insist that the collateral be sold first or for a fair price, which is why a guaranty of collection, or at least a requirement that collateral be disposed of in a commercially reasonable way, is worth asking for.

A worked example

Two partners each own 50% of a landscaping company and both sign an unlimited, joint and several guaranty on a $200,000 equipment and working capital loan. Three years later one partner sells his stake to the other and leaves, but nobody asks the lender for a release. The business struggles, the remaining owner refinances with the same lender and adds a new line of credit, and the company eventually defaults with $240,000 outstanding. Because the guaranty was continuing and waived his consent to changes, the departed partner can be pursued for the entire $240,000, including the new line he never knew about. A dollar cap, several liability, a consent requirement and a release-on-sale clause would each have changed that outcome.

What can you negotiate in a personal guarantee?

Lenders expect some negotiation, particularly from established businesses with strong financials or collateral. Even if you cannot remove the guaranty, you can often shape it.

• A dollar cap, such as 25% to 50% of the original loan amount, instead of an unlimited guaranty.
• A burn-off: the guaranty reduces or ends after 24 or 36 months of on-time payments, or once the loan balance falls below a set figure.
• Several (not joint) liability among co-owners, so each owner’s exposure matches their ownership percentage.
• A guaranty of collection instead of payment, so the lender must pursue the business and collateral first.
• Consent rights: no increase in the loan or extension of maturity without your written consent.
• A release on sale of your ownership interest, with the buyer providing a replacement guaranty.
• Removal of any confession of judgment and a cap on attorney fees.
• Exclusion of your primary residence or named personal assets.

When should you refuse to sign, and when should you get a lawyer?

Walk away or get advice before signing if the guaranty is unlimited and continuing, covers debts the business may take on with this lender in the future, includes a confession of judgment, or asks for a spouse's signature without a reason. Be especially careful if you are a minority owner without control over whether the business keeps paying: you can be on the hook for decisions you did not make.

A business lawyer can usually review a guaranty in an hour or two, which is small compared with the exposure. If you have already signed and the business is struggling, talk to the lender early. Lenders sometimes agree to restructure, accept a reduced payment from guarantors, or release a guarantor in exchange for collateral, and those options shrink once the account goes to collections. For a sense of how a balanced document is laid out, our free personal guarantee template includes a cap and a burn-off.

The Business Financing analyzer reads the loan or advance together with the guaranty, flags whether your guaranty is unlimited, continuing or joint and several, and points out confessions of judgment and default triggers that could reach your personal assets.