Personal guarantees are an inherent part of obtaining a business loan. A personal guarantee is an unsecured promise from an individual to make loan payments when the business is not able to do so. In other words, it is simply an added assurance for the lender that the loan will be paid in full. Generally, if the borrower defaults, the lender can file suit against both the borrower and the guarantor for payment. Oftentimes, lenders require another layer of protection, in addition to the personal guarantee: collateral to secure the loan.
Signing a personal guarantee comes with substantial risks, primarily related to your obligation to repay the business loan and the lender’s legal right to go after you and your personal assets if the business defaults. Think twice about providing your personal guarantee, particularly when you believe that it is not a prerequisite to obtaining a business loan. If your business is strong financially or it can offer the lender collateral to protect the loan, the lender may consider waiving the personal guarantee requirement. When faced with signing a personal guarantee, you should carefully review the personal guarantee agreement and have a lawyer review all the paperwork involved.
David R. Hague, What Every Guarantor Should Know About the One-Action Rule and Deficiency Actions, The Enterprise (April 2012).