Personal Guarantee of a Loan or Lease to a Business Entity
A personal guarantee is an individual's contractual promise to repay credit issued to a business entity in the form of a loan or a lease. The business entity mayor may not be related to the proposed guarantor. Not all personal guarantees are the same. Most are unlimited guarantees; some are limited. Some are continuing while others are not. Most personal guarantees allow the creditor to take collection action against the guarantor as soon as a default occurs. The creditor is not required to exhaust their legal remedies against the debtor or lease before taking action against the guarantor.
Signing a personal guarantee has great risk and should not be done without carefully considering the risk. Any person considering providing a personal guarantee should review the proposed document with a qualified attorney.
Very often a creditor, such as a bank, will not make a loan to an entity without the personal guarantee of the significant owners of the entity. Likewise, many building owners, or lessors, will not lease commercial space to a business entity without obtaining the personal guaranty of the significant owners of the tenant or lessee. This is a term to be negotiated by the parties. Signing a personal guarantee may have tax ramifications which should be discussed with your CPA or Enrolled Agent.
Loan applicants should be aware that the Small Business Administration (SBA) requires the principals of all borrowing entities that own 20% or more of the company, to sign a personal guarantee.