Personal Guarantee on a Business Line of Credit: What It Means for You

What a personal guarantee is

A personal guarantee is a signed promise that you will repay the debt from your own assets if the business does not. It sits on top of the business's own obligation.

Without a guarantee, a funder's claim generally stops at the business. With one, the funder can pursue you individually, which may include bank accounts, property and other personal assets, subject to state law. That is why even an LLC or corporation does not always shield the owner on a line of credit.

Our overview of the personal guarantee covers the basics across products.

Why funders ask for one

Lines are revolving and often unsecured, so the funder has less to fall back on. A guarantee gives it a second source of repayment and keeps the owner invested.

Smaller businesses have limited history and few assets, which raises risk. A guarantee offsets that risk. Funders are also looking at whether you will treat the line as a serious obligation. Stronger revenue, longer history or pledged collateral can sometimes reduce or remove the request.

Unlimited, limited and joint guarantees

Guarantees vary in scope. Read whether yours is capped, whether it covers fees and costs of collection, and whether other owners sign too.

• Unlimited: covers the full balance plus interest, fees and collection costs.
• Limited: capped at a dollar amount or a percentage.
• Joint and several: each guarantor can be pursued for the full amount.
• Continuing: covers future draws, not just the current balance.

A continuing guarantee matters on a revolving line, since every new draw is covered.

Risks to weigh

The main risks are personal liability, credit damage if the line defaults and strain on a spouse or co-owner if they sign too.

If the business fails and the line is unpaid, the funder can demand payment from you. Default may also show on your personal credit. See what happens when a business loan defaults. Draw only what you can repay, and track the balance as you would a personal debt.

Ask a lawyer to review the guarantee if the amount is large or if a spouse is asked to sign.

Ways to limit your exposure

Negotiate a cap, ask for removal after a clean payment history, keep a smaller limit, or choose a product secured by an asset.

1. Ask for a limited guarantee with a dollar cap.
2. Ask whether it can be released after a period of on-time payments.
3. Keep the credit limit near what you need.
4. Consider a secured option. See secured vs. unsecured lines.

Not every funder will negotiate, but it costs nothing to ask.

A scenario to understand the risk

Walk through a bad year in your head before you sign. If the business closed, what would you owe and from what assets?

In an illustrative example, you have drawn $40,000 on a line when a major customer leaves and sales fall by a third. If you cannot catch up, the funder can pursue the balance from you. Planning ahead means keeping draws modest, building a cash reserve and talking to the funder early if trouble starts. Funders usually prefer a workout to a lawsuit, but only if you contact them before the account is far behind.

Checking terms before you apply

Ask each funder in writing whether a guarantee is required, its scope and how it can end. ROI Funder shows terms before you sign.

Terms vary by funder and file, and ROI Funder places funding through a network of funders, so details differ. You see true cost, payback and terms before you commit. Applying takes a few minutes, uses a soft credit pull and carries no obligation. Learn about a business line of credit or apply now.