Personal Guarantees — Up Close and Personal
October 14, 2021 by Kaylan Pepin
Bank loans backed by personal guarantees are common in non-dilutive financing, but the topic is often poorly explained. This post opens up the conversation.
What is a personal guarantee?
A personal guarantee is an individual’s legal promise to repay credit issued to a business. Unlike a loan secured by one specific asset, the guarantee supports the obligation more broadly.
That does not make it a universal fit. I’ve seen guarantees used successfully to unlock competitive growth capital, and I’ve also met founders for whom that risk was a clear reason to seek another option.
Why lenders ask for one
For an owner-operated business, the founder is often essential to the company’s success. A guarantee can help a lender align commitment, manage key-person risk, and bridge the gap when the company lacks traditional collateral such as real estate or equipment.
- Ask exactly what the guarantee covers.
- Understand whether it is limited or unlimited.
- Clarify how and when it can be released.
- Review the wording with legal counsel before signing.
The point
A personal guarantee is not automatically good or bad. It is a risk-sharing tool. The important part is understanding the trade-off clearly enough to decide whether the capital, price, and terms are worth it for your situation.