Business owners routinely sign contracts on behalf of their companies. But when an agreement includes a personal guarantee, the owner may be taking on obligations that extend beyond the business and potentially put personal assets at risk.

Before signing, business owners should understand what a personal guarantee means, what it covers, and whether its terms can be negotiated.
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What Is a Personal Guarantee?

A personal guarantee is a contractual promise by an individual – often a business owner, founder, or principal – to personally satisfy certain obligations of a business if the business fails to do so.

Personal guarantees are common in business loans, commercial leases, vendor agreements, and other transactions where a lender, landlord, or supplier wants additional assurance that the business will meet its obligations.

The scope of a guarantee depends on the contract. Some are limited to a specific debt or dollar amount, while others may cover broader obligations, including interest, fees, damages, and attorneys’ fees.
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What Should Business Owners Look For?

Before signing, carefully review the following:

• Scope of liability: Determine exactly which obligations you are guaranteeing. Do not assume the guarantee is limited to the amount of the original transaction. If more than one owner is signing, check whether liability is joint and several, meaning that any one guarantor could potentially be pursued for the full amount.
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• Dollar limits: Some guarantees establish a maximum amount of personal liability. If the agreement does not contain a limit, consider whether one can be negotiated.
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• Duration: Find out when the guarantee begins and ends. Some guarantees may continue until the creditor provides a written release, even after the underlying business relationship changes.
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• Default and enforcement: Understand what must happen before the creditor can pursue you personally. The agreement may allow the creditor to seek payment from the guarantor without first exhausting remedies against the business.
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• Waivers and fees: Guarantees may contain provisions waiving certain notices or defenses and may make the guarantor responsible for collection costs and attorneys’ fees.
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Can a Personal Guarantee Be Negotiated?

A personal guarantee is not necessarily an all-or-nothing proposition. Depending on the circumstances, business owners may be able to negotiate a lower liability cap, a shorter guarantee period, a guarantee limited to specific obligations, or a release after the business establishes a satisfactory payment history.

Owners should also consider what happens if the business is sold, refinanced, restructured, or otherwise changes ownership. A transaction involving the business does not necessarily release an individual from an existing guarantee.
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State Law and Contract Terms Matter

Because the laws governing personal guarantees vary by state, applicable legal requirements can affect whether a guarantee is enforceable and the extent of the guarantor’s potential liability. The terms of both the guarantee and the underlying agreement are therefore critical to understanding the scope of the guarantor’s obligations.
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Protecting Your Personal Interests

A company’s separate legal status can provide important liability protection, but voluntarily signing a personal guarantee may create personal obligations that fall outside the company’s normal liabilities. Understanding a personal guarantee before signing can help business owners make informed decisions and avoid unexpected personal liability.

I am currently litigating a matter in which three business owners each personally guaranteed the full amount of a business debt. When the business failed to pay, the guarantors became personally responsible for the debt. The circumstances underscore why business owners should understand the scope of their personal obligations before signing a guarantee.

Personal guarantees should not be treated as routine boilerplate. Before signing, consider having the agreement reviewed by experienced legal counsel who can explain the potential exposure and identify opportunities to negotiate more favorable terms.

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