Many small-business financing products require a personal guarantee, but the requirement and scope vary by agreement. A guarantee can make an owner personally responsible if the business does not pay. Borrowing through an LLC does not automatically eliminate that obligation, and “unsecured” does not necessarily mean “no personal guarantee.”
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How Is a Guarantee Different From Collateral?
Collateral is property pledged to support an obligation. A personal guarantee is a separate promise by a person. An agreement may involve one, both or other protections. Read each provision rather than treating the product’s name as a complete description of liability.
The guarantee may be limited or broader, and more than one owner may be involved. The exact scope and consequences depend on the documents and applicable law. Have counsel review obligations you do not understand before signing.
What Questions Should I Ask Before Signing?
- Who is required to sign, and in what capacity?
- Is the obligation capped or unlimited?
- What events trigger responsibility?
- Does it continue after refinancing, renewal or an ownership change?
- What is required to obtain a written release?
Ask for the guarantee itself with the proposed funding documents. A payment schedule alone does not tell you what you would owe personally if the business encounters trouble.
How Should I Compare Two Offers With Different Guarantees?
Compare more than the interest rate. Responsibility, collateral requirements, fees and repayment flexibility all affect the decision. A smaller payment does not necessarily make a broader personal obligation preferable.
A Question for a Two-Owner Business
If each partner owns half the company, do not assume each can owe only half the debt. Ask how responsibility is allocated in the actual documents and have both owners review them. The ownership percentages alone are not enough to make that determination.
This page explains questions to raise, not how a particular guarantee will be enforced.
Educational information, not a loan offer. Availability and terms depend on the program, property or business, and borrower qualifications. Legal and tax questions should be reviewed with your advisers.