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Most business loans do require a personal guarantee. Banks, SBA lenders, and a large share of online lenders ask the business owner to sign a personal guarantee that holds them personally responsible for the debt if the business cannot repay.
Some products skip the personal guarantee, including invoice factoring (which is technically not a loan), certain revenue-based financing arrangements, and some larger corporate loans backed by significant business assets.
Whether a personal guarantee is required depends on the lender, the loan product, the size of the loan, the age of your business, and your business credit profile.
What is a Personal Guarantee on a Business Loan?
A personal guarantee is a legally binding promise that you, the business owner, will repay a business loan personally if the business cannot. The lender can come after your personal assets, including checking accounts, savings, real estate, and vehicles, to recover the debt if your business defaults. The guarantee usually applies even if your business is incorporated as an LLC or corporation, which would otherwise shield personal assets from business debts.
Personal guarantees come in two basic forms:
- Unlimited guarantee: You are on the hook for the full loan balance plus interest, fees, and legal costs if the lender has to collect.
- Limited guarantee: Your liability is capped at a specific dollar amount or a percentage of the loan. Limited guarantees are more common when multiple owners share responsibility for the debt.
When Personal Guarantees Are Required
Personal guarantees are standard practice across most small business lending. They are required on:
- SBA loans: Per the SBA's Unconditional Guarantee form, any individual who owns 20% or more of a business applying for an SBA loan must provide an unlimited personal guarantee. The SBA loans page has more on how these loans are structured.
- Bank term loans: Almost universally require a personal guarantee, especially for businesses under five years old.
- Online business loans: Most online lenders require a personal guarantee on their core products, regardless of how the loan is marketed.
- Business credit cards: Standard issuance includes a personal guarantee, which is why business credit card applications check personal credit.
- Equipment financing: Some lenders waive the personal guarantee when the equipment itself acts as sufficient collateral, but many still ask for one.
Lenders use personal guarantees to manage risk. Without one, a borrower can dissolve a business that owes money and walk away clean. With one, the lender has a path to recover the debt even if the business fails. The newer the business, the smaller the loan, and the weaker the business credit profile, the more likely the personal guarantee requirement.
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When You Can Get a Business Loan Without a Personal Guarantee
A few financing structures generally do not require a personal guarantee:
- Invoice factoring: Invoice factoring is technically a sale of receivables rather than a loan. The factoring company collects from your customer, so no personal guarantee is needed.
- Certain revenue-based financing: Some revenue-based financing or merchant cash advance products skip the personal guarantee, especially when the advance is repaid through automatic deductions from card processing volume.
- Large corporate loans: Businesses with significant collateral, strong revenue, and an established credit history may negotiate the personal guarantee out of a loan agreement.
- Some SBA loan variations: For SBA loans, owners with less than 20% equity are generally not required to provide an unlimited personal guarantee, though the SBA may still require a limited guarantee in some cases.
In practice, most small business owners signing up for a line of credit or short-term loan should expect a personal guarantee to be part of the deal.
Comparing Personal Guarantee Requirements by Loan Type
| Loan Type | Personal Guarantee? |
|---|---|
|
SBA 7(a) loan |
Yes (20%+ owners, unlimited) |
|
Bank term loan |
Usually yes |
|
Business line of credit |
Almost always yes |
|
Short-term business loan |
Usually yes |
|
Equipment financing |
Often yes (depends on collateral) |
|
Invoice factoring |
No |
|
Merchant cash advance |
Sometimes |
|
Business credit card |
Yes |
How to Reduce Personal Guarantee Risk
Even when a personal guarantee is required, you have options for managing the exposure:
- Negotiate a limited guarantee. If multiple owners are involved, ask whether each can sign a limited guarantee proportional to their ownership stake rather than each carrying unlimited liability.
- Push for a guarantee cap. Some lenders will agree to cap your personal liability at a specific dollar amount.
- Build business credit first. Strong business credit, longer time in business, and clean financials all give you leverage to negotiate. The guide on business loan requirements covers what lenders evaluate, and whether you need good credit for a business loan breaks down how credit fits the picture.
- Pay attention to the release terms. Personal guarantees sometimes include language that releases the guarantee once the business hits certain financial milestones. Confirm whether that is in the agreement.
- Read the entire loan agreement. Personal guarantee terms often appear in a separate document. Do not assume you know what you have signed without reading.
For business owners weighing personal guarantee risk against the cost of capital, alternative lenders, including BusinessCapital.com, generally require a personal guarantee on their core loan products but offer products like invoice factoring where the structure removes the need for one. Different products in the funding options menu carry different guarantee structures, so it pays to compare across products rather than assume every option works the same way.
Frequently Asked Questions
Can I get a business loan without a personal guarantee at all?
Yes, but the options are limited. Invoice factoring, some revenue-based financing arrangements, and certain large corporate loans skip the personal guarantee. Most term loans, lines of credit, and SBA loans require one.
Does a personal guarantee affect my personal credit?
A personal guarantee itself does not show up on your personal credit report. However, if the business defaults and the lender invokes the guarantee, the resulting collection activity, judgment, or charged-off debt can damage your personal credit significantly.
Can I remove a personal guarantee after signing?
In most cases, no. Personal guarantees usually stay in place for the life of the loan unless the agreement includes specific release terms tied to business performance milestones.
What happens to a personal guarantee if my business closes?
The personal guarantee survives the business. If the business owes money and shuts down without paying, the lender can pursue the guarantor personally, regardless of whether the business still exists.
Are personal guarantees required for unsecured business loans?
Yes, often. The term "unsecured" refers to whether physical collateral backs the loan, not whether a personal guarantee is required. Most unsecured business loans still come with a personal guarantee. For more on the distinction, see can you get a small business loan without collateral.
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