Personal Guarantees: How Signing for a Business Debt Puts Your Assets at Risk

Lenders and landlords often ask owners of small companies to sign a personal guarantee. It makes you personally responsible if the business cannot pay, even if the business is an LLC or corporation.

What it means

• The creditor can pursue your personal assets if the business defaults.
• It can defeat the liability protection of an LLC or corporation for that debt.
• It may be unlimited or capped, and may cover interest and collection costs.

Types

• Unlimited guarantees for the full debt.
• Limited guarantees for a set amount or period.
• Joint and several guarantees, where each guarantor can be pursued for the whole debt.

Ways to limit risk

1. Negotiate a cap or a sunset date.
2. Ask for release after a payment history is established.
3. Read the default and acceleration terms.
4. Understand how the guarantee ends if you sell the business.
5. Have an attorney review before signing.

If the business is failing

Talk to a lawyer early. Options may include renegotiation, a payment plan or a wind-down plan. Ignoring the debt can lead to lawsuits and judgments. See our guides to small business debt and bankruptcy.

Why lenders and landlords ask for one

A new or small business often has few assets and no long credit history. A personal guarantee gives the lender or landlord a second source of repayment: the owner. Even if the business is an LLC or corporation, the guarantee is a separate contract in which you promise to pay the company's obligation personally if it fails. Many owners sign without realizing that this can put their home, savings and other assets at risk.

Different kinds of guarantees

• Unlimited guarantee: covers the entire debt plus interest, fees and costs.
• Limited guarantee: capped at a dollar amount or a percentage.
• Good-guy guarantee: common in commercial leases, it limits liability if the tenant gives notice and surrenders the space.
• Continuing guarantee: covers future debts, not just one loan.
• Joint and several guarantee: the creditor can collect the full amount from any guarantor.

Terms to negotiate

1. A cap on the amount and a time limit.
2. A burn-off provision that reduces or ends the guarantee after a period of timely payments.
3. Notice and a chance to cure before the creditor can demand payment.
4. Limits on what costs and fees are covered.
5. A requirement that the creditor pursue the business or collateral first, though many contracts waive this.
6. Release if you sell your ownership interest.

Spouses and family members

In community property states, a spouse's property may be exposed even if the spouse did not sign, depending on state law. Some lenders require spouses to sign consents. A family member asked to guarantee a loan should understand that they may be pursued for the whole debt. See our guide to cosigning risks.

If the business is struggling

• Talk to the lender early about modification or forbearance.
• Understand that closing the business does not cancel the guarantee.
• Keep records and avoid moving assets in ways that look like fraud.
• Consider legal advice about settlement or bankruptcy options.
• See our guides to debt settlement and business bankruptcy.

Terms to know

• Guarantor: the person who promises to pay.
• Principal debtor: the business borrower.
• Waiver of defenses: giving up certain legal defenses.
• Cross-default: default on one debt triggers another.
• Deficiency: the balance remaining after collateral sale.
• Subrogation: the guarantor stepping into the lender's rights after paying.

Scenarios

1. A restaurant owner signs a lease guarantee. The restaurant closes and the landlord sues the owner for unpaid rent.
2. A business owner signs a limited guarantee for $50,000. The cap limits exposure even if the loan is larger.
3. A two-owner company has one guarantor. The guarantor can seek contribution from the other owner if agreed in writing.

Frequently asked questions