A personal guarantee is one of the most important contract terms a small business owner can sign. It is also one of the easiest to overlook. The business owner may think the company is signing the contract, but the guarantee can make the owner personally responsible if the company cannot pay.

Personal guarantees appear in commercial leases, equipment financing, vendor agreements, bank loans, lines of credit, dental practice acquisitions, merchant cash advances, and supply contracts. They are common, but that does not mean they should be signed casually.

The basic issue is limited liability. One reason business owners form LLCs or corporations is to separate business obligations from personal assets. A personal guarantee can contract around that protection. If the company defaults, the landlord, lender, or vendor may pursue the individual guarantor, not just the company.



In a commercial lease, a personal guarantee can become especially risky. If the business closes early, the owner may still be responsible for unpaid rent, late fees, common-area charges, taxes, insurance, buildout obligations, attorney fees, and other lease damages. For dental practices and other professional offices with expensive buildouts, the numbers can become significant.

Equipment loans and dental practice financing raise similar concerns. A dentist buying a practice may personally guarantee the acquisition loan, equipment financing, lease obligations, and vendor contracts all at once. The result can be layered personal exposure if the transition does not go as planned.

Before signing, business owners should ask whether the guarantee can be limited. Possible revisions include a cap on liability, a burn-off after timely payments, a shorter guarantee period, exclusion of consequential damages, a requirement that the creditor pursue the business first, or a release when the business reaches certain financial benchmarks.

Owners should also understand whether the guarantee is joint and several. If multiple owners sign, one owner may be pursued for the full amount, even if the default was caused by someone else. That risk should be addressed in the owners’ internal agreement.

A personal guarantee is not always avoidable. Many landlords and lenders require them. But the business owner should know exactly what is being guaranteed, how long the obligation lasts, and whether there is any way out.

The worst time to understand a personal guarantee is after the business is already in default. Review the language before signing, negotiate where possible, and make sure the risk is consistent with the deal.

Brenden Kelley Law reviews leases, loans, vendor contracts, and dental practice agreements to help business owners understand and negotiate personal guarantee exposure.

Additional legal and practical context

A personal guarantee changes the risk profile of a business deal. Without a guarantee, the creditor may generally be limited to the business and its assets, subject to the contract and applicable law. With a guarantee, the owner may be personally responsible if the business defaults. That means the creditor may be able to pursue the owner’s bank accounts, wages, real estate, or other personal assets depending on the wording of the guarantee, the judgment, and collection law.

Personal guarantees are common in commercial leases, business loans, equipment financing, dental practice acquisitions, vendor credit applications, and merchant processing agreements. They are also common in SBA financing. The Small Business Administration explains that SBA-backed financing is provided through participating lenders, and SBA lending materials often require owner guarantees for those with significant ownership interests. See the SBA’s 7(a) loan program materials and lender and development company loan program regulations.

Owners should look for whether the guarantee is limited or unlimited. A limited guarantee may cap liability by dollar amount, percentage, time period, or event. An unlimited guarantee may make the guarantor responsible for the full debt, interest, late fees, attorney fees, costs, and collection expenses. Some guarantees are continuing guarantees, meaning they may apply not just to the first transaction but also to future obligations unless revoked in the manner required by the agreement.

Dental practice owners should be particularly careful. A practice acquisition may involve a bank loan, seller financing, office lease assignment, equipment leases, supplies, technology contracts, and merchant services. Each document may contain a separate personal guarantee. Even if the purchase is structured through an LLC or corporation, the owner may have personally guaranteed multiple obligations without appreciating the cumulative risk.

Practical takeaway

Before signing, ask whether the guarantee can be narrowed. Consider negotiating a cap, burn-off provision, release after timely payments, release after assignment, limitation to certain obligations, or exclusion of consequential damages and attorney fees. If the other side refuses to remove the guarantee, the owner should at least understand the worst-case exposure before signing.

Sources and further reading

•            SBA 7(a) Loans

•            13 C.F.R. Part 120 - Business Loans