What is a personal guarantee? | The Industrial Capitalist

A personal guarantee is a promise by an owner that if the company cannot pay a debt, the owner will. It is the reason this publication talks about people whose names are on the loan documents. For a small industrial business, almost every equipment loan, line of credit, lease, and acquisition loan carries one. The company’s limited liability protects the owner from many things; a guarantee is the owner voluntarily giving that protection up for one lender.

What it covers

Usually the full amount of the debt, plus interest and costs, and usually jointly from every owner above a threshold share, each liable for the whole. Some guarantees are limited to a fixed amount or a percentage. Some are secured by a specific asset, most often a home. Read which kind you are signing.

Why lenders want it

A small company’s assets are hard to sell and easy to move. The guarantee aligns the owner’s attention with the lender’s money, and it is the single biggest reason lenders will fund a young business at all. It is also why growth by acquisition is a personal decision, not just a corporate one.

Getting released

Pay it off. The simplest route, and the one most owners take with their first loans.
Grow past it. Larger, more established businesses can negotiate guarantees away or cap them as the lender’s comfort grows.
Sell. A buyer assumes or refinances the debt, and the seller’s guarantees are released at closing, which is a condition every seller should insist on.