Should You Personally Guarantee a Loan to Your Small Business?

Even though you believe wholeheartedly in your business, be wary of personally guaranteeing your business loan. After all, if your business goes belly up, you stand to lose major personal assets - most likely your house.

You may not think twice about signing a personal guarantee for your business: After all, you believe wholeheartedly your business will succeed. However, many financial experts would urge you to personally guarantee a business loan only as a last resort. After all, if your business goes belly up, you stand to lose major personal assets - most likely your house.

Before you decide to personally guarantee a small business loan, think about what a personal guarantee means. The guarantee applies only to you, not your business partners or managers. It means that you are declaring an individual pledge to make good on the loan, usually without exception. Depending on how your contract is written, you may be responsible for the loan even if your business is protected by limited liability laws. Many lenders require borrowers to personally guarantee a loan or secure it with personal assets if your business is organized as a limited liability entity. Learn more about the Elements of Successful Small Business Loan Applications.

You may even be responsible for the loan after your business has been dissolved. When you issue a personal guarantee, you are acting as a cosigner on the loan. As such, creditors will go after you in the event that the borrower (your business) fails to make the loan payments.

But every loan carries some degree of risk, even if you do not personally guarantee it. In some cases, a lender may have the right to sue you personally if your business is a sole proprietorship or general partnership. If the lender successfully sues you, they can confiscate your personal assets to satisfy the loan. Another thing to consider is that if you are married, your spouse may have to cosign the promissory note. In that event, your jointly owned possessions are on the line for the debt, as well as your spouse's assets and income. Learn more about Bank Loans for Small Businesses.

If you have exhausted all your other financing options, a personal guarantee may be your last resort. Guaranteeing a loan for your business demonstrates a high level of personal commitment to your business, which lenders like to see. Keep in mind that if you personally guarantee a loan to a business, you can expect a phone call from the lender if things go south.

In some cases, however, you may not have a choice if you want that loan. The Small Business Administration (SBA) requires that all loans they guarantee must also be personally guaranteed by any person with a 20 percent or larger ownership interest in the business. In addition the loans will typically be collateralized with some or all of the business's assets and possibly with personal assets such as a second home mortgage. If you are seeking an SBA-backed loan, chances are not likely that you could find much better loan terms through banks and other lenders.

Get more information on other business funding and loan options for launching your new venture at AllBusiness.com.

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