DEFINITION of 'Personal Guarantee'

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.

BREAKING DOWN 'Personal Guarantee'

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.

RELATED TERMS
  1. Business Guarantee

    A credit card agreement in which any debts accrued on a corporate ...
  2. Business Credit Card

    A credit card intended for use by a business rather than for ...
  3. Credit Card

    A card issued by a financial company giving the holder an option ...
  4. Secured Credit Card

    A type of credit card that is backed by a savings account used ...
  5. Credit Card Balance

    The amount of charges, or lack thereof, owed to the credit card ...
  6. Prepaid Credit Card

    A card issued by a financial institution that is preloaded with ...
Related Articles
  1. Small Business

    How to Use Small Business Credit Cards

    A small business credit card can be a convenient way to increase your company's purchasing power, but must be carefully managed.
  2. Personal Finance

    Should You Use Credit Cards To Fund Your Business?

    We give you 4 reasons to consider using a credit card instead of a business loan to fund your business, and how to be smart about it.
  3. Personal Finance

    How Credit Cards Affect Your Credit Rating

    The average American household has four cards, but does that mean more is better?
  4. Personal Finance

    How To Establish A Credit History

    Can't get a credit card without a credit history, and can't get a history without a card? Break the Catch-22.
  5. Personal Finance

    Why and How to Use Credit Cards Effectively

    When used responsibly, credit cards play a big role in establishing a good credit score that can help you obtain loans, mortgages and insurance.
  6. Personal Finance

    3 New Types Of Credit Cards To Look For

    These three types of credit cards are becoming popular with customers looking to pay less fees and build up their credit scores.
  7. Personal Finance

    Build Your Credit Score

    Here are four good ways to build your credit score when you're starting from scratch. Do it right and you'll end up with excellent credit.
  8. Personal Finance

    Understanding Credit Cards

    Credit cards are a type of unsecured personal loan between the credit card issuer and the credit card holder.
  9. Personal Finance

    Why Too Many Credit Cards Can Hurt Your Credit Score

    Find out why having too many credit card accounts can adversely impact your credit score if the cards are not managed properly.
Trading Center