A personal guarantee makes a business owner personally responsible for a business obligation if the business does not pay, which puts personal assets at risk even when the business is an LLC or corporation. Guarantees can be unlimited or limited, and joint and several when several owners sign. Rockstone Lending, a small-business funding broker in Yuma, Arizona, explains them but gives no legal advice. Call (928) 436-5545.
| What it is | An owner's promise to pay a business obligation personally if the business does not |
|---|---|
| Common forms | Unlimited, limited, joint and several, continuing, and guarantees of performance on merchant cash advances |
| Different from collateral | Collateral is a specific asset; a guarantee reaches the person who signs it |
| Arizona note | A.R.S. 25-214 requires both spouses to join in a guaranty to bind community property; ask an attorney what that means for you |
| Who decides | Each lending partner sets its own guarantee requirements |
What a personal guarantee is
When a business borrows, the business is the borrower. A personal guarantee adds a second source of payment: the person who signs it, usually an owner. If the business does not pay as the agreement requires, the lender can pursue the guarantor under the guarantee's terms.
Lenders ask for guarantees because a small business often has a short credit history and few assets of its own, and an LLC or corporation generally shields its owners from the company's debts. A guarantee is the owner's voluntary exception to that shield for one obligation.
How a guarantee is enforced depends on its wording. Some guarantees let the creditor go to the guarantor as soon as the business defaults; others require the creditor to pursue the business first. The difference matters, and it is written into the document.
Do all business loans require a personal guarantee?
No single rule applies. Many lenders that serve small businesses ask the owners to guarantee, and whether yours will depends on the partner, the product, the business and the collateral involved. A secured loan may still come with a guarantee, and an unsecured one often does. Rockstone Lending can't tell you in advance what a partner will require.
Common types of guarantees
Unlimited guarantee
The guarantor is responsible for the whole obligation, and often for interest, fees and collection costs as the agreement defines them.
Limited guarantee
The guarantor's responsibility is capped, for example at a stated amount or share of the obligation, or limited to a period or a specific debt. The cap is whatever the document says; read the exact wording.
Joint and several guarantee
When two or more owners sign, each can be responsible for the whole obligation the guarantee covers, not only a proportionate share, and the creditor can choose whom to pursue. Owners who split a business evenly are not necessarily splitting the guarantee evenly.
Continuing guarantee
A guarantee that covers future, renewed or additional obligations, not only the loan in front of you. Check whether it ends when this loan is paid or stays in place until you are formally released.
Guarantees on merchant cash advances
A merchant cash advance is not a loan, and MCA agreements often include a guarantee of performance (sometimes called a validity guarantee) instead of a promise to pay a debt. It typically covers the business keeping its promises under the agreement, such as not diverting receivables or changing bank accounts without notice. How far it reaches depends entirely on the wording; have your attorney read it.
Personal guarantee vs. collateral vs. cosigner
| Arrangement | What it is | What is at risk |
|---|---|---|
| Collateral | A specific asset pledged to secure the financing | That asset, as the agreement and the lien describe it |
| Personal guarantee | A person's promise to pay if the business does not | The guarantor's personal assets generally, within any limit in the guarantee |
| Cosigner or co-borrower | A second party who signs the obligation itself | The cosigner is responsible from the start, not only after a default |
How these labels apply in a particular agreement depends on its wording. Our funding glossary defines the related terms.
LLCs, corporations and sole proprietors
An LLC or corporation formed through the Arizona Corporation Commission is a separate legal entity, which is why lenders ask owners to guarantee its obligations. Signing a guarantee does not undo the entity for other purposes, but for that obligation the owner stands behind the business personally.
A sole proprietor has no separate entity. The business and the owner are the same person, so the owner is already responsible for the business's debts, and a separate guarantee may not be part of the paperwork at all. Our guide to funding for LLCs and sole proprietors covers what each structure changes in a partner's review.
Married owners in Arizona: community property
Arizona has community-property rules for married couples. Under A.R.S. 25-214, either spouse can generally manage community property and bind the community alone, but the statute requires joinder of both spouses for "any transaction of guaranty, indemnity or suretyship."
That is one reason a lending partner may ask about your marital status or ask your spouse to sign. What it means for your household's property, and for a guarantee signed by only one spouse, is a legal question for an Arizona attorney. Rockstone Lending gives no legal advice.
How long a personal guarantee lasts
A guarantee generally lasts as long as its own terms say: often until the obligation it covers is paid in full, or until the creditor releases the guarantor in writing. Selling your share of the business or stepping away from it does not necessarily end a guarantee you signed. Continuing guarantees can also reach renewals and new obligations.
When the obligation is paid, ask the creditor to confirm in writing that the guarantee is released, and keep that letter with the payoff statement.
What to read before you sign
- Who is signing, and in what capacity: as an owner, as a guarantor, or both
- Exactly what obligation it covers: this loan only, or future and renewed obligations too
- Any limit: a cap, a share or a time limit, and how it is calculated
- Joint and several language if more than one owner signs
- Waivers: guarantees often waive notices or defenses the guarantor would otherwise have
- Pledged assets: whether the guarantee is secured by a personal asset, such as an account or property
- A confession of judgment or similar clause; see the glossary entry
- Release terms: what has to happen for you to be released
It is reasonable to ask whether any of these points can be changed. Some partners will discuss a limit or release terms and some won't; ask in writing. Our checklist of questions to ask before signing an offer covers the rest of the agreement, and an attorney can tell you what the guarantee means for you.
How Rockstone Lending helps
Rockstone Lending connects you with lending partners; partners make credit decisions and set rates and terms. Each partner decides whether to ask for a guarantee and what kind. We'll tell you what a partner is asking for, but we can't negotiate legal terms for you or say what a guarantee means for your personal situation. See how the process works or start an application.
By Rockstone Lending · Updated
