Financial institutions sometimes require a personal guarantee from a company’s owner in order to approve a business loan. A personal guarantee is a contract between a business owner and the lender in which the owner assumes personal liability for the debt if the company can’t repay it for whatever reason. 

As such, personal guarantees reduce a lender’s risk when making business loans, which are usually larger than personal loans. Without requiring a personal guarantee, if a limited liability company or corporation was unable to repay the loan, the lender would have little recourse in collecting on the debt because the member’s or owner’s personal assets would be shielded from liability. 

Most lenders decide whether to require a personal guarantee for a business loan based on the company’s credit history and revenue. If the company is young and, thus, its credit history is short and/or it makes less than $25 million a year in revenue, a personal guarantee is usually necessary to secure a loan.

Although there is nothing inherently wrong with signing a personal guarantee, realize that it is an enforceable legal document. As a business owner, the inability to repay a loan that you personally guaranteed will thus have major consequences. 

Your Personal Credit and the Company’s Credit Will Suffer

If you default on a loan that you personally guaranteed, both your personal credit history and that of your company will be impacted. The exact amount of credit damage will depend on the circumstances, including how much of the loan you couldn’t repay, the payment arrangements you make, and what other personal and corporate debt you have. If the debt is large, not only will the default significantly lower your business and personal credit scores, but it could prevent you from taking out another personal or business loan. That is because the default will be reported to both the personal and business credit bureaus. 

You Could Lose Your Personal Assets

If a business owner personally guarantees a loan and cannot repay it, the lender can collect on the loan (and usually the associated legal fees) by taking your personal assets. These can include your home, car(s), savings accounts, retirement funds, and anything else of value.

How much of your personal assets would be at risk depends, in part, on whether you signed an unlimited personal guarantee or a limited personal guarantee. An unlimited guarantee allows a creditor to collect 100 percent of the loan amount and usually any associated legal fees from the borrower’s personal assets. By contrast, with a limited guarantee, the lender may only collect a portion of the loan amount set by the terms of the loan when it was made. As a result, the borrower may not lose as many of his or her personal assets.

Note that even if a borrower signs an unlimited guarantee, Arizona’s Homestead Exemption (A.R.S. Section 33-1101 et seq.) offers some protection for homeowners from judgment creditors. Specifically, it keeps up to $150,000 of the equity in a debtor’s home from being used to satisfy a judgment. However, any equity in the home above that is not protected.

The bottom line is that you should never sign a personal guarantee without understanding what type of guarantee it is and what will happen if you can’t repay it. This includes if you are the owner of a type of business that normally confers limited liability on the owners, such as a corporation or limited liability company; these limited liability protections do not apply to liability for a loan that the owner personally guaranteed. 

Because the consequences of failing to repay personal guarantees are significant, including damaged credit and major debt, do not personally guarantee a business loan without carefully considering the risks. This will require an honest look at your personal finances and those of your company, as well as other pertinent circumstances. An experienced attorney like Timothy Coons can offer the objective advice needed to make a wise decision.

Contact Counxel Legal Firm

If you would like to talk to an attorney about signing personal guarantees or are wondering if a personal guarantee is worth the risks, contact Counxel Legal Firm at 480-536-6122 or at intake@wordpress-457010-3165254.cloudwaysapps.com. 

This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact intake@wordpress-457010-3165254.cloudwaysapps.com or 480-536-6122 to request specific information for your situation.

*Conveniently located off the 101 Freeway and the US 60 in the middle of Phoenix, Scottsdale, Tempe, Chandler, Gilbert, Mesa, and Queen Creek!