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:
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.
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.
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.
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
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.
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.
New businesses fail at high rates. Since they lack:
Solid revenue history
Business credit
Collateral
Lenders compensate with a personal guarantee to ensure repayment.
Understanding variations helps you negotiate:
You are fully responsible for 100% of the debt.
Your liability is capped at a specific amount or percentage.
Multiple partners share responsibility, but lenders can pursue any one of them for full repayment.
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.
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.