Why Lenders Request Personal Guarantees

A personal guarantee (PG) is a legal promise that if your business cannot repay the loan, you personally will. Lenders use PGs because most small businesses—especially new ones—don’t yet have the strong financial history, assets, or cash flow to qualify on their own.

Below are the core reasons lenders rely on personal guarantees:

1. To Reduce the Lender’s Financial Risk

Most small businesses have:

• Limited credit history

• Unpredictable cash flow

• Few valuable assets

A personal guarantee gives lenders another layer of protection.
If the business fails, they can recover funds from the owner personally.

2. To Ensure Borrower Accountability

A PG signals to lenders that you are:

• Personally invested

• Serious about repayment

• Confident in your business

It reduces the chance of abandonment or default because your personal assets are on the line.

3. Because the Business Isn't Strong Enough on Its Own

Even profitable businesses may not meet risk standards.
A PG compensates for:

• Low time in business

• Limited annual revenue

• Weak business credit

• Few or no assets

The PG reassures lenders that someone with stronger credit is backing the loan.

4. To Approve More Borrowers

Ironically, personal guarantees actually help MORE businesses get funded.

Without a PG:

• Many applications would be denied

• Risk would be too high

With a PG:

• Lenders can approve more loans

• Borrowers can qualify for larger amounts

• Interest rates may be lower

5. Because Most Small Business Loans Traditionally Require It

Personal guarantees are standard practice, especially for:

• SBA loans

• Bank loans

• Credit unions

• Online lenders

• Equipment financing

• Business lines of credit

Unless your business is large and well-established, expect a PG to be required.

6. To Protect Against Fraud or Evasion

A PG discourages:

• Fraudulent loan applications

• Avoiding repayment by shutting down the business

• Moving assets out of the company

It creates legal accountability at the personal level.

7. Because Startups and New Businesses Have the Highest Risk

New businesses fail at high rates. Since they lack:

• Solid revenue history

• Business credit

• Collateral
  Lenders compensate with a personal guarantee to ensure repayment.

Types of Personal Guarantees

Understanding variations helps you negotiate:

Unlimited PG

You are fully responsible for 100% of the debt.

Limited PG

Your liability is capped at a specific amount or percentage.

Joint & Several PG

Multiple partners share responsibility, but lenders can pursue any one of them for full repayment.

When Personal Guarantees Are NOT Required

Lenders may waive the PG if your business has:

• Strong credit

• Significant revenue

• Solid collateral

• Long operating history

• Low debt

• High cash reserves

This is more common for larger corporations or well-funded businesses.

Bottom Line

Lenders request personal guarantees because they want protection, accountability, and reassurance that the loan will be repaid — especially when the business lacks the strength to stand on its own.