Personal guarantees on business debt

A personal guarantee is your promise to pay a business debt yourself if the business does not. It turns a business debt into a personal one, so the lender can look to your bank accounts, your wages and, depending on your state, other property you own.

Guarantees show up almost everywhere in small business credit: SBA-backed loans, bank lines of credit, equipment leases, office leases, business credit cards and many merchant cash advances.

The wording decides how exposed you are. These are the terms worth finding before any negotiation starts.

SBA rules say that holders of at least 20 percent of the business generally must guarantee the loan (eCFR, opens in a new tab), and the lender can require other people to guarantee it too. So when an SBA-backed loan defaults, the guarantors are part of collection from the start.

If the loan is later referred to the Treasury, federal collection can reach guarantors as well. The Treasury's Cross-Servicing program (U.S. Treasury, Bureau of the Fiscal Service, opens in a new tab) can garnish wages and offset federal payments owed to people who owe the debt.

No, not by itself. Closing the doors does not cancel a guarantee. Under the Bankruptcy Code, the discharge of a debt does not affect the liability of any other entity (Cornell LII, opens in a new tab) on that debt, and that includes a guarantor.

A company that files Chapter 7 (U.S. Courts, opens in a new tab) does not receive a discharge at all: only individuals do. Its assets are sold and the case ends, and the guarantors can still be pursued for what was not paid.

It raises the stakes of the paperwork. A lender can agree a settlement with the business and still keep its rights against you, unless the agreement releases you by name. Guarantors are often why a lender weighs a settlement at all, because it can compare the offer with what it could collect from them.

Guarantors can often negotiate for themselves as well as for the business: a lower payoff in exchange for a release, a payment plan sized to personal income, or a cap on what they will pay. Expect the lender to ask for proof of what you own and earn.

Clear Financial Company negotiates business debt with funders and lenders, and a guarantee is part of every business debt relief negotiation we take on. We do not give legal advice, so a guarantor who has been sued should talk to an attorney first.