Definition of Loan Guarantee

A loan guarantee is a promise by a person or an entity to assume a debt obligation in the event of nonpayment by the borrower.
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The person or entity that guarantees the loan is referred to as the guarantor.

Loan guarantees are important to small business owners because most small business creditors will require a personal guarantee on a loan.

For example, when a small business signs an office lease, there will typically be a signature for the business representative (e.g. the President or CEO) but there will also be a second signature requirement for the owner as an individual. Signing the lease as an individual means that the business owner will be personally liable for the office rent, even if the business cannot pay the rent for the office space.

This personal liability on a loan is binding due to the language in the contract; it doesn't matter if the business has incorporated in order to limit personal liability.

Loan guarantees also come up in the context of SBA loans. For some SBA loans, the government will guarantee the loan so that the bank is more willing to extend credit to a business than it might otherwise be. However, just because the bank has a loan guarantee from the government doesn't necessarily mean that the borrower is off the hook in the event of default. The government can still go after the individual business owner for the default loan amount.

Even on a contract to buy something as simple as office supplies, there may be some small print that says that you personally guarantee the payment to the supplier. After all, suppliers are creditors too so they will often ask for a personal loan guarantee.

Long story short, it's important to read the fine print on any small business credit vehicle to understand the terms with respect to loan guarantees.

Loan Guarantee References On This Site

These Gaebler.com articles mention this glossary term:

• Financing For Franchises - Many banks are willing to finance franchised small businesses, especially if you are willing to pursue a loan guarantee through the Small Business Administration (SBA...
• Small Business Stimulus Programs - If you are thinking of applying for an SBA loan, you will be happy to know that SBA 7(A) loan guarantees have been increased to up to 90% of a...
• Financing For Franchises - Many banks are willing to finance franchised small businesses, especially if you are willing to pursue a loan guarantee through the Small Business Administration (SBA...
• Small Business Stimulus Programs - If you are thinking of applying for an SBA loan, you will be happy to know that SBA 7(A) loan guarantees have been increased to up to 90% of a...