Business News Select | SMPost | Terms

Term: Personal Guarantee

4 Mar 2015

An individual’s legal promise to repay charges to a business credit card. Providing a personal guarantee means that if the business becomes unable to repay its credit card debts, the individual guarantor is personally responsible. The personal guarantee provides an extra level of protection to credit card issuers, who want to make sure they will be repaid.

Personal guarantees are especially important for small businesses. Banks recognize that a small business’s financial health is closely tied to its owner’s financial health. That’s why they consider the owner’s credit history when deciding whether to approve a business credit card application. It’s also why they hold the owner responsible for repaying all credit card balances if the business is unable to. A business bankruptcy would not protect the guarantor from having to use personal assets to repay the business’s credit card debts. The guarantor would have to file for personal bankruptcy to get relief from personally guaranteed business debts.

A personal guarantee might seem like an extra risk to the business owner, but without it, credit might not be available at all. Many small businesses have little to no credit history of their own for lenders to consider. If the owner’s personal credit history is good, a personal guarantee makes it possible to get credit for the business. Don’t be surprised if you’re asked for your Social Security number when you apply for a business credit card.

To find out if you must provide a personal guarantee for a business credit card, read its terms and conditions. Look for language such as “you, as an individual and the authorizing officer of the company…are agreeing to be jointly and severally liable with the company for all charges to the account.” Well-established businesses that have a significant commercial credit profile may be able to obtain a business credit card without a personal guarantee.

Organizing your business as a corporation or LLC rather than a sole proprietorship or partnership can provide greater protection for your personal assets in the case of certain business debts, such as money owed to suppliers. But most entities, including suppliers, are smart enough to require a personal guarantee regardless of your business structure. Taking on debts in the name of a business isn’t a way to get out of repaying them. Read all agreements and contracts carefully to see whether you can be held personally liable for a debt you incur for your business. Make sure you’re comfortable taking on the risk before you sign.

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