X-Banker

What Does a Personal Guarantee Mean?

May 26th, 2008

By The XBanker

Sometimes when you are close to a subject it’s easy to forget that what is obvious to you may not be so obvious to someone outside the industry.

Case in point: personal guarantees.

For most people the meaning of the term “personal guarantee” is pretty obvious – you agree to personally be responsible for the repayment of the loan. It is usually used in a business sense: a business owner who signs a personal guarantee for a business loan is agreeing to be personally responsible for the loan if the business does not repay it. The term is not usually used in the context of personal loans because when you sign the note for the loan you are implicitly providing your personal guarantee. But it’s there.

We were pretty surprised and confused, then, when Entrepreneur recently published an article that muddied the waters. In “Nothing Personal: How can you protect yourself and your assets from risk when securing a business loan?” author Rosalind Resnick replied to a reader who was asking about how to find non-recourse loans that do not require the borrower’s personal guarantee.

The first part of her answer was fine, although I may have started out by explaining the difference between non-recourse loans and personal guarantees to make sure the reader understood what those terms mean. (A non-recourse loan is typically a secured loan in which the collateral can be repossessed, but the borrower is not personally liable if he or she defaults.)

However the second part of the article was just, well, wrong. There, the author described Prosper as an example of a service that facilitates loans that “don’t require personal guarantees.” Huh? Take a look at the sample promissory note provided on the Prosper website. A borrower is most certainly agreeing to guarantee repayment personally. (You wouldn’t get too many lenders if the loans didn’t carry a personal guarantee.) And Prosper reports all loans on borrower’s personal credit reports (not just loans with late payments as the article implies). How could they report to the loans on the borrower’s personal credit if the borrower wasn’t personally guaranteeing the loan?

Here’s where it gets bizarre.

My colleague Luke Adams, who has been both a Prosper borrower and lender, pointed out the error to Entrepreneur magazine, which then contacted Prosper. In an email exchange between the editor and Prosper, the Prosper representative told Entrepreneur that the loan did not require a personal guarantee because no collateral was involved.

Again, terms that seem obvious are getting mixed up here. Whether a loan is secured (collateral) versus unsecured (no collateral) has nothing to do with a personal guarantee. While I couldn’t find a formal definition of personal guarantee on the SBA website (I guess they assume everyone knows what it means, too), I did find this reference which clearly distinguishes between personal guarantees and collateral as separate and distinct loan terms.

Don’t get me wrong. I love reading Entrepreneur magazine and I won’t cancel my subscription over this. I also think Prosper is one of the best innovations in lending I’ve seen in my 20-year career in consumer credit education. (Though my fingers are crossed that they will develop a true business loan option.)

But in the meantime, if you are looking for a business loan with no personal guarantee, make sure you’re getting the right advice.

This entry was posted on Monday, May 26th, 2008 at 9:15 am and is filed under Business Credit, Personal Credit, personal guarantee. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

1. Brian said at June 30th, 2008 at 2:03 pm

   So am I understanding the lingo correct here. I have a small business loan which I have signed a personal guaranty for. Is this loan then considered “Secure”? Thanks for any further clarification.

   Brian

2. Gerri Detweiler said at August 15th, 2008 at 7:25 am

   I am sorry I missed this question Brian!

   Secured means it is secured by collateral — money in the bank, equipment etc. — which can be repo’d if you don’t pay back the loan. A personal guarantee or guaranty means that you agree to be personally responsible for the loan (not just the corp.). Does that make sense?

3. JJS said at August 20th, 2008 at 12:13 pm

   If we signed personal guarantees on a business loan or lease and then the business goes bankrupt, I assume that the personal guarantee will force us also into personal bankruptcy since we wouldn’t be abale to pay the business debt with our personal money?

4. Jes said at October 11th, 2008 at 6:02 am

   I don’t see a response to JJS, so I would like to ask you again. My husband owns an electrical business that he took a loan out for and the personal guarantee is our house. If his business goes bankrupt, and if we go personally banrupt…can the bank still somehow come after us? Will going personally bankrupt as well secure us from not having to personally pay back the business loan?

5. Ruby said at December 3rd, 2008 at 2:38 pm

   I want to start my own business I have personally put up $30,000 in website development and prelim. marketing. At this point I need funds for marketing. I did invest in marketing for my demographic and was blown away at the results, they were massive. At this point I’m out of money to continue further.
   How can I obtain a loan as a woman just starting my own business.

   Any help or suggestions would be greatly appreciated

   Ruby B.

6. Stephanie said at February 13th, 2009 at 8:52 am

   Hi, I am a personal guarantor on a lease for a copier and it was a 3 year lease and I had to shut the business down after 2 years because it was a mortgage shop which obviously started heading south last year! I have the copier and have told them that I can pay out the rest of the lease and they can get the copier but now they are asking me to send in personal bank statements to view my financial situation etc. and I really don’t want to have to do that. Any suggestions?

7. Ginny said at February 25th, 2009 at 8:30 am

   I am filing bankrupcy. I am a guarantor on a van loan with another business. The business is not under my name. The title is under my social and tax ID of other business. Am going to have the van taken away from me?

8. Frank said at July 23rd, 2009 at 9:13 am

   I am a partner with three other individuals in a building which is part commercial space and four apartments above. The partnership is in the form of an LLC. We have recently completed a $300K renovation of the building which was self funded by the partners with the understanding that the LLC would take out a mortgage to reimburse the partners when the renovation was complete. The bank has approved our mortgage, but is requiring personal guarantees from each partner as recourse. My question is will this mortgage show up on the partners’ credit reports and impact their ability to secure financing for other personal ventures.

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