What Is a Personal Guarantee in a Business Loan?

If you are a business owner in Ontario looking to borrow money, whether from a bank, a lender, or even a landlord for a commercial lease, you have probably come across the term personal guarantee. It can sound like a routine part of the paperwork, but signing one may mean taking on personal responsibility for a debt that technically belongs to your corporation. Below is a general look at what a personal guarantee is, why lenders ask for one, and why the wording matters.

Why Corporations Do Not Always Protect You

One of the main reasons people incorporate a business is to create a separate legal entity, which generally means the corporation is responsible for its own debts, not the individual owners personally. This is often referred to as limited liability. However, lenders are usually aware of this too, and many are not willing to extend credit to a newer or smaller corporation based on the corporation's assets alone, especially if the business does not have a long financial history or significant assets of its own.

This is where a personal guarantee often comes in. By asking the business owner, or sometimes multiple owners, to personally guarantee the loan, the lender gets an extra layer of security. If the corporation cannot repay the debt, the lender may be able to pursue the individual who signed the guarantee for some or all of the amount owing, depending on how the guarantee is worded.

What a Personal Guarantee Actually Does

In simple terms, a personal guarantee is a separate promise, usually signed alongside the main loan agreement, in which an individual agrees to be personally responsible for the corporation's debt if the corporation does not pay. This means the guarantor's personal assets, such as savings, property, or other holdings, may potentially be at risk if the business defaults, depending on what the guarantee allows the lender to do.

A guarantee can apply to a bank loan, a line of credit, equipment financing, a commercial lease, or other forms of business credit. It is not limited to traditional bank lending, so it is worth checking whether a personal guarantee is part of any financing or lease arrangement you are considering, not just a formal loan.

Why the Wording of the Guarantee Matters

Not all personal guarantees are the same, and small differences in wording may have a significant impact on what a guarantor is actually agreeing to. Some guarantees are limited, meaning they cap the guarantor's responsibility at a specific dollar amount or a portion of the debt. Others are unlimited, meaning the guarantor could potentially be responsible for the full amount owing, along with interest and costs, depending on the terms.

A guarantee may also be described as joint and several if there is more than one guarantor, which generally means the lender could pursue any one guarantor for the full amount, rather than dividing responsibility evenly, depending on how it is drafted. Some guarantees continue even after a loan is renewed, refinanced, or increased, while others may be tied more narrowly to a specific loan or transaction. Because of these differences, it is generally important to read a personal guarantee closely, rather than assuming it works the same way as any other guarantee you may have seen before.

What Happens if the Business Cannot Repay the Loan

If a corporation defaults on a loan that is backed by a personal guarantee, the lender may have the option to pursue the corporation, the guarantor, or both, depending on the terms of the guarantee and the loan agreement. This can mean the guarantor becomes personally responsible for a debt even after the business has closed, been sold, or filed for bankruptcy, since a personal guarantee is generally a separate obligation from the corporation's own liability. Whether and how a lender chooses to pursue a guarantor can depend heavily on the specific facts and the wording of the documents involved.

Things to Think About Before Signing

Before agreeing to a personal guarantee, it may help to think about how much you are personally comfortable risking, whether the guarantee is limited or unlimited, whether it applies to a single loan or to broader future borrowing, and whether other guarantors are involved and how responsibility might be shared among them. It may also be worth considering whether there is room to negotiate the terms of the guarantee before signing, since lenders do not always present the only possible version of the document.

What This Means for You

A personal guarantee can be a normal part of securing business financing, but it is not something to sign without understanding what it actually commits you to. Because the specific wording can significantly affect how much risk you are taking on personally, it is generally a good idea to have a personal guarantee reviewed before you sign it, rather than after a problem comes up.

Frequently Asked Questions

Q: Do I always need to sign a personal guarantee to get business financing?

A: Not always, though many lenders ask for one, particularly for newer or smaller businesses. Whether it is required can depend on the lender, the type of financing, and the financial history of the business.

Q: What is the difference between a limited and unlimited personal guarantee?

A: A limited guarantee generally caps how much the guarantor could owe, while an unlimited guarantee may leave the guarantor responsible for the full debt, including interest and costs, depending on the wording.

Q: Can I be held responsible under a personal guarantee even after my business closes?

A: In some cases, yes. A personal guarantee is generally a separate obligation from the corporation's debt, so it may continue even if the business closes, is sold, or becomes insolvent, depending on the terms.

Q: Can the terms of a personal guarantee be negotiated?

A: In some cases, yes. Depending on the lender and the situation, there may be room to negotiate a cap, a time limit, or other terms before signing, though this is not guaranteed.

Contact DevLaws

If you are considering signing a personal guarantee, or you are already dealing with one, the team at DevLaws is here to help. Contact DevLaws today to schedule a consultation and talk through your specific situation.

contact@devlaws.com | +1 437 290 0424 | devlaws.com

Disclaimer

This article is provided for general information purposes only and does not constitute legal advice. It is not intended to create a lawyer-client relationship. Laws and regulations can change, and the information here may not reflect the most current developments. Every situation is different, and the information in this article may not apply to your specific circumstances. If you have questions about a personal guarantee or a business loan, you should consult a qualified lawyer for advice tailored to your situation. DevLaws does not guarantee any particular outcome or result.