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Promissory Note vs Personal Guarantee: What’s the Difference?

Starting, as well as growing, a business requires capital. Depending on the size of your business, you may need anywhere from $50,000 to over $1 million. While you can finance your business with a loan, you may encounter some otherwise confusing terms, such as promissory notes and personal guarantees. All lenders will require you to sign a promissory note. Some of them, however, may require you to make a personal guarantee as well.

Promissory Note vs Personal Guarantee: What’s the Difference?

What Is a Promissory Note?

A promissory note is a “promise” to repay the loan according to the lender’s terms and conditions. It comes in the form of a legally binding document. When seeking a loan, the lender will require you to sign a promissory note. The promissory note will outline your obligations as the debtor.

Most promissory notes will include the following information:

  • Amount of the loan
  • Interest rate
  • Payment schedule
  • Late fees
  • Clauses

What Is a Personal Guarantee?

A personal guarantee, on the other hand, is a provision in which you agree to repay a business loan using your own personal assets. It will essentially make you “personally” responsible for the loan. You can still repay the loan using your business’s money and assets. If your business fails or is otherwise unable to repay the loan, however, the lender may claim ownership of your personal assets to satisfy the debt.

Personal guarantees are common with unsecured business loans. Unsecured business loans don’t require collateral. As a result, lenders may require you to make a personal guarantee when obtaining an unsecured business loan. It’s designed to protect the lender from financial loss. With a personal guarantee, you are giving the lender permission to claim ownership of your personal assets if you don’t repay the loan.

Differences Between Promissory Notes and Personal Guarantees

Promissory notes and personal guarantees aren’t the same. They are two different loan-related financing terms with their own meaning and purpose. Promissory notes are legally binding documents that all lenders require. You can’t obtain a loan without signing a promissory note.

Lenders, on the other hand, may or may not require a personal guarantee. Most lenders don’t require a personal guarantee for secured business loans. Secured business loans are backed by collateral. Therefore, lenders don’t need a personal guarantee. Lenders can claim ownership of the collateral in the event of default.

This article was brought to you by Intrepid Private Capital Group – A Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.

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Intrepid Private Capital Group • December 30, 2021


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