When applying for a business loan, a lender may require a personal guarantee. If that happens, it is important to understand what a personal guarantee means in practice and what responsibilities it creates.

A personal guarantee is often required for young businesses or companies with limited collateral. Understanding when lenders ask for one and how it may affect your personal finances can help you make informed decisions.

What is a personal guarantee?

A personal guarantee means that a business owner or another private individual agrees to be personally responsible for a business loan. If the business cannot repay the loan, the guarantor becomes responsible for the outstanding debt. Depending on the terms of the agreement, this could involve personal savings, salary income or, in some cases, other personal assets.

For this reason, a personal guarantee is a significant financial commitment that can have a direct impact on your personal finances.

When do lenders usually require a personal guarantee?

A lender may ask for a personal guarantee when:

• the business does not have sufficient collateral
• the loan amount is large compared to the size of the business
• the business is new or operates in an industry that is considered higher risk than average