Personal Guarantees in Business Contracts Explained
What Is a Personal Guarantee?
A personal guarantee is a commitment by an individual — typically a business owner, director, or officer — to be personally liable for a business obligation if the business fails to pay. It pierces the liability protection that a corporation or LLC normally provides, putting the guarantor's personal assets (home, savings, investments) at risk.
Landlords, lenders, and vendors commonly require personal guarantees from small business owners.
Types of Personal Guarantees
Unlimited guarantee — The guarantor is liable for the entire obligation plus all associated costs (interest, legal fees, collection costs). This is the most common and most risky type.
Limited guarantee — The guarantor's liability is capped at a specific dollar amount or percentage of the obligation.
Continuing guarantee — Covers not just the current obligation but future obligations as well, remaining in effect until formally revoked.
Joint and several guarantee — Multiple guarantors are each individually liable for the full amount, not just their proportional share.
When Personal Guarantees Are Requested
- Commercial leases for new or small businesses
- Business loans, especially for startups without established credit
- Vendor credit accounts
- Equipment financing
- Business credit cards
How to Limit Your Exposure
- Negotiate a cap — Convert an unlimited guarantee to a limited one
- Add a sunset provision — The guarantee expires after the business establishes a payment history
- Exclude specific assets — Carve out your primary residence or retirement accounts
- Require notice before enforcement — Ensure you receive notice and an opportunity to cure before personal assets are targeted
- Negotiate release triggers — Automatic release when the business reaches certain financial milestones
When to Consult a Lawyer
Before signing any personal guarantee, consider having an attorney review the terms and negotiate limitations. The consequences of an unlimited personal guarantee can be financially devastating.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.