Should You Personally Guarantee Your Business' Debt?

If your small business needs cash to get started or grow, you might be considering opening credit cards or obtaining financing through a lending institution. But unless your business is already well-established for at least two years, and is taking in millions annually, most lenders will require you to personally guarantee small business credit cards and financing.

The right way to fund a business is always a dilemma for all business owners: to start/grow you need capital. But when the only option is to personally guarantee business debts, you have to think long-term - beyond the business and look at how taking on new business debt can affect you personally.

Three Signs That Now Is Not A Good Time to Personally Guarantee Business Debt

It might not be wise to guarantee business debt, if:

1. The Business Cannot Repay Its Own Debt: If your business is unstable and you are not fully confident it can repay all the debt you will have to pay out of your own personal pockets. If the business goes bankrupt, unresolved debts could be reported on your personal credit report.
2. You Need or Will Need More Personal Credit: If you are planning now, or may need personal financing to buy a car, new home, remodeling, or take out loans for college, or for personal debt consolidation in the near future, it may not be wise to guarantee business debt.

   Your business debt may be listed on your personal credit report making it harder for you to get personal financing.

3. You Already Have a High Debt-to-Income Ratio: As unfair as it is, personally guaranteeing business debts counts as debts against you - but the business' income probably will not be considered your income (unless you own a sole proprietorship.)

   Even if the business is paying off its own debts, as long as it has debt you signed for, it will count against you.

Tips: Before Guaranteeing Small Business Debts

Remember, if you co-sign or guarantee your business debts, it is the same thing as taking on more personal debt.

If you cannot repay the business debt on your own, or, if having business debts on your personal financial record will hurt your ability to secure personal financing - don't do it.