In this article
What is a personal guarantee on a business loan?
It is your written promise to repay the loan from your own assets if the business cannot. Lenders commonly ask for one from the owners of small and younger businesses, because the company has little history or few assets of its own. It can be unlimited or capped, and its terms are often negotiable.
Most small business owners meet the personal guarantee at the last step of the loan process: a line in the agreement that says, in effect, "if the company does not pay, you will." It is routine for lenders and serious for you. A few minutes of understanding beforehand is worth far more than a few minutes of regret afterwards.
What a personal guarantee is
A limited company is a separate legal person, so the business's debts are normally the business's problem. A personal guarantee changes that for one loan: you agree to be responsible for it personally if the company defaults. The lender can then pursue you, not just the company.
Why lenders ask for one
- The business is new and has little history to judge
- The company owns few assets that could secure the loan
- The owner and the business are, in practice, the same: one person makes the decisions
- It shows the owner has a stake in making the loan work
Types of guarantee
- Unlimited: you are responsible for the full amount, plus interest and costs
- Limited: capped at a set dollar amount or a percentage of the loan
- Joint and several: if there are several guarantors, the lender can pursue any one of them for the whole debt
- Time-limited or "burn-off": the guarantee ends after a set period of on-time payments
In Quebec, the equivalent is called a suretyship (*cautionnement*) and the rules for it come from the Civil Code. If you are guaranteeing a loan there, see our French-language guide on la caution personnelle.
The risks to take seriously
- Your personal savings, vehicles and sometimes your home can be pursued if the business defaults
- A default can affect your personal credit as well as the company's
- Co-owners or family members who sign are exposed too, and may not have a say in how the business is run
- A guarantee can outlast your involvement unless the agreement ends it clearly
What you can negotiate
- A cap. Ask for the guarantee to be limited to a portion of the loan.
- A release. Ask for it to fall away after a period of on-time payments or when the business reaches certain financial targets.
- Security instead. Offer specific business assets or equipment as collateral, so the loan is secured by the asset rather than by you.
- Fewer guarantors. If you have partners, share the exposure rather than leaving it to one person.
- Clear termination. Make sure the document says when and how the guarantee ends.
Products that may need less personal exposure
Because the asset secures it, equipment financing sometimes needs less personal backing than an unsecured loan. Some government-backed programs have their own security rules; see CSBFP explained. Whatever the product, always read the guarantee clause before you sign.
Protecting yourself
- Keep business and personal finances strictly separate
- Keep a copy of every document you sign
- Track the loan balance so you know what you are on the hook for
- If the business is struggling, speak to the lender early rather than waiting for a default
