Why You Should Include a Personal Guarantee in Business Credit Applications


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Business credit applications are a critical part of commerce. Not everyone has the capital to pay upfront for every purchase, so extending credit can help companies sell more to buyers who need a little time to make payments. But what happens when a buyer doesn’t have much credit history? Should sellers take the risk of extending credit to an unknown entity? Or should they move on, meaning they miss out on some sales?

In many cases, companies can solve this business finance dilemma via personal guarantees. By including personal guarantees within credit applications, or by adding personal guarantees as separate agreements, more companies may be able to obtain credit, while sellers can reduce their risk

What Is a Personal Guarantee? 

A personal guarantee makes a business owner personally responsible for credit obligations that the business doesn’t fulfill. These can be used when applying for a business credit card, a business loan, and also when companies extend vendor or trade credit. 

In the context of trade credit, a personal guarantee essentially acts as a second line of defense for sellers. If a buyer does not pay according to the terms of the credit agreement, due to a business bankruptcy, for example, the personal guarantee can lead to an individual compensating the seller from the buyer’s personal assets.

Keep in mind, however, that personal guarantees distinctly differ from “Credit Terms and Conditions of Sale” clauses. A Credit Terms and Conditions of Sale clause allows sellers to look into a company’s credit history and makes the purchasing company financially responsible for meeting the terms of the credit agreement. That requires its own signature, and if a business owner also wants to include a personal guarantee, that would require another signature.

While the Credit Terms and Conditions of Sale and a personal guarantee are two different and distinct agreements, they often live in the same document — a completed and signed credit application.

Signing a personal guarantee can help facilitate business financing, though both parties should also understand the risks. A business owner who signs a personal guarantee takes on a personal obligation for business debt. That can remove some of the protections that might otherwise come with business structures like an LLC, where limited liability means business partners’ personal finances could be shielded even if the business can’t meet its obligations. Signing the personal guarantee, however, puts a small business owner personally on the hook. 

Sellers also have to weigh the risk of a business owner not being able to personally meet business credit obligations. 

Benefits of Personal Guarantees in Business Credit Applications


While personal guarantees do carry some risks, these clauses can also provide several benefits for both buyers and sellers that might outweigh any concerns, depending on your situation and risk tolerance.

Some of the top benefits include:

  • Reducing the seller’s risk of not receiving payment: If a business has limited or poor credit history, sellers might be worried about receiving payment. A personal guarantee, however, can reduce that risk if a seller deems a buyer to be personally creditworthy.

    “A guarantee on file means that additional assets are available to the creditor if the debtor company defaults and this increases the likelihood of getting paid,” says Michael Dennis, a consultant at DC Associates, with over 25 years of experience as a credit manager across several industries. “If payment is not made, the guarantee gives the creditor company, or their attorney, or their collection agency an additional party to contact and pressure for payment and/or to collect payment from.”


  • Helping buyers qualify for credit: From the buyer’s perspective, adding personal liability via a personal guarantee can help a business become a borrower. Sometimes businesses don’t qualify for credit on their own, such as how a recently launched small business might not have much, if any, credit history or a credit score.

    So, rather than getting shut out of deals, a personal guarantee can help buyers still qualify for business credit. When making credit decisions, having that additional line of defense might give sellers the confidence to still go forward with providing business financing to a new company.

    “Signing a guarantee indicates confidence in the debtor company on the part of the guarantor, which in turn gives the creditor confidence about selling on open account terms,” notes Dennis, who is based in Frederick, Maryland.


  • Agreeing to better terms: Not only can personal guarantees help with extending/receiving credit in the first place, but they can also lead to better terms for borrowers. For example, personal guarantees can help borrowers lock in lower interest rates, as online business lender Lantern Credit notes. Plus, personal guarantees can potentially be used in place of collateral. “A personal guarantee can also be a more attractive option if you'd prefer not to tie collateral to a loan, or don't have collateral to secure one,” notes a U.S. News article.

How to Use a Personal Guarantee in Business Credit Applications

While buyers and sellers should both be aware of the risks that personal guarantees can carry, many companies decide to go forward with them due to the many benefits they provide. As Dennis notes, however, some customers don’t realize the implications of personal guarantees, so it’s important for both parties to go into the agreement with a full understanding.

So, that can mean having an attorney review any personal guarantee language to make sure sellers can enforce the agreement if needed and that buyers have clarity on what they’re getting into.

In some cases, borrowers and lenders will prefer to make a personal guarantee a separate agreement. But you can also make personal guarantees part of a business credit application by adding a separate clause to your existing application. 

An easier option might be to use business credit application software like Nectarine Credit that automatically includes the ability to add personal guarantees to business credit applications. The software includes templated language that clients can use when asking buyers to sign personal guarantees, or they can easily upload their own text into the platform.

That way, buyers can digitally review and sign credit applications, and you can create a secure, digital audit trail of any agreements.

Ready to see how Nectarine Credit can help you seamlessly add personal guarantees into your credit application process?

Schedule a demo of the Nectarine Credit platform today.