When negotiating a loan or line of credit, the type of guarantee a bank requires can materially change your risk exposure. If a lender is requesting a personal guarantee rather than a corporate guarantee, this is more than a formality, it directly affects your personal financial risk.
Before signing, it’s important to understand what’s being requested, how it works, and what options may exist to limit exposure.
Personal vs. Corporate Guarantees
Personal Guarantee (PG) You agree, as an individual, to be responsible for the debt. If the business defaults, the lender may pursue personal assets, including savings, home equity, and investments.
Corporate Guarantee (CG) Another business entity—often a parent company or affiliate—guarantees the loan. In this case, the lender’s recourse is limited to that entity’s assets, not personal ones.
Key distinction: A personal guarantee extends risk beyond the business and into personal finances. A corporate guarantee keeps liability within the corporate structure.
Risks Associated with a Personal Guarantee
- Potentially unlimited liability: Unless capped, responsibility may extend to the full outstanding balance, plus interest, legal costs, and fees.
- Personal credit impact: A default can negatively affect personal credit and future borrowing capacity.
- Exposure of personal assets: Depending on state law and the guarantee language, personal property may be at risk.
- Bankruptcy implications: Businesses can restructure through bankruptcy. Personal bankruptcy is generally more complex and more difficult to recover from.
Questions to Address Before Signing:
Guarantee structure
- Is the guarantee limited or unlimited?
- Is it secured or unsecured?
- Is liability joint and several if there are multiple guarantors?
- Can the exposure be capped at a defined amount or percentage?
- Can a sunset provision be included?
- Does the guarantee apply only to this facility or to future obligations as well?
Enforcement terms
- Under what circumstances can the lender enforce the guarantee?
- Will business assets be exhausted before personal assets are pursued?
- What notice is required prior to enforcement?
Possible alternatives
- Can the guarantee be shifted to a corporate entity?
- Can additional business collateral reduce or eliminate the need for a PG?
- Would a partial guarantee be acceptable?
- Would pricing adjustments change the guarantee requirement?
Managing and Reducing Exposure
- Have legal counsel review all guarantee language prior to execution.
- Narrow the scope by capping amounts, defining time limits, and tying the guarantee to a specific obligation.
- Maintain strict separation between business and personal finances.
- Evaluate insurance options such as life, disability, or key person coverage.
- Monitor loan covenants closely to prevent technical defaults.
Bottom Line
A corporate guarantee contains risk within the business. A personal guarantee extends that risk to the individual.
When a personal guarantee is required, the decision should be deliberate and informed. The structure of the guarantee often matters as much as the interest rate itself.
Download the Personal vs. Corporate Guarantee Checklist here.
About the Florida CFO Group
As a group of fractional CFOs, The Florida CFO Group works with small and mid-sized businesses to design capital strategies, navigate lender relationships, and ensure financial stability. Whether you’re considering your first loan or refinancing existing debt, we help you make confident, data-driven decisions.
About the Author
Tim Fischer is an entrepreneur and seasoned CFO who works closely with small business owners to navigate complex, ambiguous challenges. With a practical, data-driven approach, he helps leaders clarify their options, make sound financial decisions, and identify the most sustainable and profitable path forward for their businesses.
Contact Us
If you have any questions or would like to discuss your organization’s finance and strategic management needs, please call the Florida CFO Group at 1-877-352-2367 or send us a message. We are here to help you navigate your financial challenges and achieve success!