If a business does not own property, valuable equipment or other suitable collateral, lenders may require the business owner to provide a personal guarantee instead. The same may also apply when an otherwise healthy business is making a major investment or expanding rapidly.

Why do lenders require a personal guarantee?

There are generally two reasons. First, the lender wants to reduce its financial risk. If the business cannot repay the loan and there is not enough collateral, the personal guarantee provides additional security. Second, a personal guarantee shows that the business owner is committed to the business and is willing to stand behind it personally.

Example 1: a café owner expanding the business

A small café has been operating for two years in a good location. It has a steady customer base, but profits are still modest. The owner wants to renovate the café and purchase a new espresso machine, requiring a loan of approximately 60,000 €.

The business does not own property or have significant assets that can be used as collateral, so the lender cannot rely solely on the company's balance sheet. After reviewing the financial statements, the lender considers the investment to be reasonable, but financing cannot be approved based only on the company's collateral. As a solution, the lender offers a business loan on the condition that the owner provides a personal guarantee for part of the loan amount.

Why is the guarantee required? Without additional security, the lender considers the risk too high given the company's size and operating history. The personal guarantee makes the financing possible. At the same time, it means that if the business cannot repay the loan, the responsibility may also extend to the owner's personal finances.

Example 2: a construction company experiencing growth

A small construction company wins a major contract that requires new equipment, additional employees and material purchases before the first customer payment is received. There is plenty of work ahead, but the company does not have enough cash available to cover these upfront costs.

The company has an established operating history, but the construction industry is sensitive to economic cycles and much of the company's revenue depends on a few large customers. The lender agrees to provide a business line of credit and a loan to start the project. However, one of the conditions is that the owner and, where applicable, a co-owner provide a personal guarantee for an agreed portion of the financing.

Why is the guarantee required? A major contract creates both opportunities and risks. If the project is delayed or the customer pays late, the lender does not want repayment to depend solely on the company's finances. The personal guarantee provides additional security, making it possible for the financing to be approved.

What should business owners consider before providing a personal guarantee?

A personal guarantee is not automatically a bad thing. It may be the only way to obtain financing and support the growth of the business. At the same time, it is an important commitment that should be considered carefully.

Before signing the agreement, it is worth taking the time to think about the following.

How much is your liability? Ask the lender to clearly state the maximum amount covered by the guarantee. There is a significant difference between guaranteeing 20,000€ and guaranteeing the entire loan amount together with interest and fees.

How long does the guarantee last? Check whether the guarantee has a fixed term, whether you can be released from it at a later stage and how that process works in practice.

How could it affect your personal finances? Consider what would happen if the business could not repay the loan. Think about your overall financial situation, including your family, jointly owned assets and any existing mortgage or other personal loans. All of these factors should be taken into account.

Can the terms be negotiated? Many business owners do not realise that the amount, duration and other terms of a personal guarantee can sometimes be negotiated. You do not always have to accept the lender's first proposal if there are alternative financing options and a clear picture of your company's financial situation.

How can we help?

When business owners negotiate with lenders on their own, it is easy to sign whatever is put in front of them, especially when financing is needed quickly.

We can help by:

• reviewing your financing needs and your company's situation in clear, straightforward language before you meet with a lender
• comparing offers from different lenders so you do not have to settle for the first proposal, where the personal guarantee may be broader than necessary
• negotiating the guarantee terms, including the maximum liability and the duration of the guarantee, and explaining every part of the agreement clearly
• making sure that the financing solution and any personal guarantee support your company's long-term plans, not just a temporary cash flow shortage.