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.

A personal guarantee sends an important message to a potential lender or lessor. It says you have confidence in your ability to perform your obligations under any circumstances and that you are willing to provide a guarantee of your required performance backed by your personal assets.

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.

Non-Recourse Loans

A non-recourse loan is a secured loan that limits the lender's recovery to the collateral that has been pledged as security. This is nearly always real estate or marketable securities such as stocks and bonds. In the event of a default, the borrower is protected from personal liability unless he or she has committed fraud or other misconduct as defined in the loan agreement. Given that lenders can only look to the collateral for repayment, their risk is higher. Consequently, the interest rates and credit requirements for non-recourse loans are always higher. The majority of commercial banks will not make non-recourse loans. Those that will usually limit these loans to existing preferred customers with excellent credit.

Written Contracts Required

The Statute of Frauds is a legal doctrine requiring certain types of significant contracts to be in writing and signed to be legally enforceable, preventing fraud and misunderstandings by demanding written proof for complex agreements like those involving real estate, long-term services (over a year), sales of goods over $500 (under the UCC), marriage promises, or guarantees for another's debt. Its primary objective is to provide evidence and caution parties in major transactions, though exceptions (like part performance) can make some oral contracts valid.