Personal Guarantees on Business Loans: What Owners Sign

Many small business owners set up a company so that business debts stay with the business. Then a lender asks them to sign a personal guarantee, and that line between business and personal money gets blurry. This guide explains in plain terms what a personal guarantee is, what to look for in the paperwork, and when it may make sense to talk with a lawyer.

What a personal guarantee is

A personal guarantee is a promise by a person, often an owner, to repay a business debt if the business does not. The loan is still made to the company. The guarantee adds a second source of repayment: you.

That is why a guarantee matters even if your business is an LLC or a corporation. The company structure may protect you from many business debts, but a signed guarantee is a separate promise you make yourself. If the business stops paying, the lender may be able to look to the guarantor, depending on the wording of the documents and the law that applies.

Lenders often consider who stands behind a loan when they decide whether to approve it. The SBA's page for lenders, for example, notes that lenders may use the credit score or credit history of the applicant, associates, and guarantors when they review an SBA-backed loan. You can read that on the SBA lenders page.

An SBA guaranty is not the same as your guarantee

People sometimes confuse two kinds of guarantees on SBA loans. The U.S. Small Business Administration does not usually lend money itself under its main loan program. According to the SBA 7(a) loan page, the 7(a) program "provides a loan guarantee to lenders," and borrowers apply through a local lender. The SBA also says that "you will always work directly with your lender and not with SBA."

The SBA's guaranty protects the lender. The SBA lenders page explains that the SBA will purchase the guaranteed portion of a loan if a borrower defaults. That is a promise from the SBA to the bank, not a promise to you. It does not erase what you owe as a borrower, and it does not cancel a personal guarantee you signed.

What to read before you sign

Guarantee documents are often short, but the details matter. Before you sign, read the guarantee itself, not just the loan summary. Points that people commonly ask a lawyer about include:

• How much is covered. Some guarantees cover the full loan plus interest and collection costs. Others are limited to a set amount or a share of the debt. Check which one you have.
• Which debts are covered. Some guarantees apply only to one loan. Others cover "all obligations" of the business to that lender, including future loans.
• Who else is signing. If several owners sign, the documents may say each one can be asked to pay the whole amount, not just their share.
• Collateral. Find out whether you are also pledging personal property, such as a home or savings, as security.
• How the guarantee ends. Ask whether it ends when the loan is paid, when you sell your share of the business, or only when the lender releases you in writing.
• Your spouse. In some situations a lender may ask a spouse to sign. Find out why, and what that signature means.

If something is unclear, ask the lender to explain it in writing. You can also ask whether any terms can change, such as a cap on the amount. Lenders may or may not agree, but asking is common.

What can happen if the business cannot pay

If a business falls behind on a guaranteed loan, the lender's next steps depend on the loan documents and the law. The lender may contact the guarantors, ask for payment, or take steps to collect.

Federal loans can follow their own collection rules. For example, the SBA's page on COVID-era programs says that a COVID-19 EIDL account may be referred to the Treasury Offset Program after reaching 120 days of delinquency, and some delinquent loans are transferred to the Treasury's Cross-Servicing Program. The SBA says that once a loan is referred to Cross-Servicing, it is no longer serviced by the SBA. Those rules apply to that program; other loans have their own terms.

If you are a guarantor and the business is struggling, it usually helps to act early. Read the documents again, keep copies of all letters, and write down dates of calls and payments. A lawyer can review your options, which may include talking with the lender, looking at whether the guarantee is enforceable as written, or considering other paths such as bankruptcy. Bankruptcy is a federal process, and whether it fits your situation is a question for a licensed attorney.

Free help with understanding a loan

Before you sign, you can get free or low-cost guidance on business finances. The SBA says on its local assistance page that you can find a Small Business Development Center or another resource partner by ZIP code. Its resource partners page lists Small Business Development Centers, SCORE mentors, Women's Business Centers, and Veterans Business Outreach Centers.

These counselors can help you understand loan terms and plan your cash flow. They are not your lawyer, and they cannot tell you how a court would read a guarantee. For that, you need a licensed attorney. If cost is a concern, the USAGov legal aid page explains how to look for free and low-cost legal help.

When to talk with a lawyer

Many owners sign a guarantee without any trouble. You may want a lawyer to review the papers if:

• the guarantee is unlimited or covers future debts;
• you are pledging your home or other major personal property;
• several partners are signing and you are not sure who pays what;
• you are selling the business or leaving it and want to be released;
• the business has missed payments and the lender has contacted you.

A business lawyer can explain what the documents say. They cannot promise that a lender will change terms or that a debt will go away.

Frequently asked questions

Does an LLC protect me if I signed a personal guarantee?

The company structure and the guarantee are separate. A signed guarantee is generally your own promise to pay, so the LLC alone may not protect you from that debt. A lawyer can review your documents.

Does the SBA guarantee protect me as the borrower?

According to the SBA, its guaranty is given to lenders, and the SBA may buy the guaranteed portion if a borrower defaults. It is not a promise to the borrower.

Can I get released from a guarantee when I sell my share?

Sometimes, but it usually depends on the documents and on the lender agreeing. Ask for a written release rather than assuming the guarantee ends.

Where can I get free help understanding loan terms?

SBA resource partners such as Small Business Development Centers and SCORE offer counseling. For legal advice, talk with a licensed attorney or check legal aid options.

Related: Browse guides on legal topics and find business lawyers.

This page is general information, not legal advice. Laws change and every case is different — talk to a licensed attorney about your situation.