Personal guarantees on business loans, explained

Incorporating a business separates its debts from yours. A personal guarantee puts part of that back: you promise the lender that if the company does not repay, you will.

Most small business loans in Canada — from banks, BDC, government programs and alternative lenders alike — ask the owners for one. Here is what it means and what to check.

Why lenders ask for it

A small company's assets and history are often not enough on their own to support a loan. A personal guarantee gives the lender a second source of repayment, and it tells the lender that the owners are committed: the people running the business have their own name on the line.

Even the federal Canada Small Business Financing Program allows lenders to take an unsecured personal guarantee of up to the amount of the loan.

What it means in practice

If the company stops paying and the lender cannot recover the debt from the business, the lender can pursue you personally for what is owed under the guarantee. How far that goes depends on exactly what you sign:

• Unlimited guarantee — you are liable for the whole debt, plus interest and costs.
• Limited guarantee — capped at a set dollar amount or a percentage of the loan.
• Unsecured guarantee — your promise, without a specific asset pledged behind it.
• Secured guarantee — backed by something you own personally, such as a charge on your home. This is a much bigger commitment, and it should be stated plainly if it is being asked for.

With more than one owner, guarantees are often joint and several: the lender can pursue any one guarantor for the full amount, not just their share.

A guarantee is not a lien on your house

A standard personal guarantee is a promise, not a mortgage. It does not, on its own, register anything against your home. Only a guarantee that is expressly secured does that. If you are not sure which you are being asked to sign, ask — and have a lawyer read it.

What to read before you sign

• Is it limited or unlimited? If limited, to what?
• Is it secured? Against what?
• Does it cover only this loan, or all present and future debts of the company to that lender? An "all obligations" guarantee can reach debts you have not taken on yet.
• Does it end when the loan is repaid, or does it continue?
• What happens if you sell your shares or leave the business? A guarantee usually stays with you until the lender releases it — selling the company does not end it by itself.
• Is your spouse being asked to sign? Ask why. Where they are not an owner, it is worth questioning.

Can you avoid one?

Sometimes, but rarely for a small business. The factors that can reduce or remove the requirement:

• A strong, established business with years of financial statements
• Good security — equipment, receivables or property that covers the loan
• Negotiating a limit instead of removing it altogether — a cap, or a guarantee that steps down as the loan is repaid

Equipment financing and asset-based lending, where an asset secures the loan, sometimes carry lighter guarantee terms than unsecured loans of the same size — but ask rather than assume.

The honest summary

A personal guarantee is normal and usually unavoidable for a small business. It is also a real commitment. Borrow what the business can repay from its own deposits — the business loan calculator will help you check — and read the guarantee as carefully as the loan itself. For the rest of what lenders ask for, see business loan requirements.