How to Remove a Personal Guarantee?

October 16, 2025

by a searcher from Cornell University - SC Johnson College of Business in Salt Lake City, UT, USA

What is the most strategic path to removing a personal guarantee when buying a business with debt (either conventional or SBA loan)? I've heard that if you start with an SBA loan, you can refinance after approximately 2 years of stable historical financials to a conventional loan, but assume that this new loan will still have a PG attached. Just curious about strategies to remove the PG (eventually) and the timeline to do so. Thanks in advance for your advice.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I get asked this question often. Unfortunately when you are buying a small business, most institutions require the personal guarantee. The reason the guarantee is so important to lenders is not so much because they want to chase the guarantors personally if there is a default on the loan. It is really in place because most small businesses have a limited balance sheet and control of the business fully rests with the owners. The owners can make decisions that hurt the business or do things to the business the hurt the lender. Without some sort of control in place, many more deals would go bad for lenders. The personal guarantee provides an incentive for the owner(s) to act in not only their own best interest but also the best interest of the business and the lender. Furthermore, for those business owners who often see the business as their own personal piggy bank, where it is hard to separate the owner's assets from the business's, the owner is incentivized to reinvest in the business when issues come up versus just pulling the cash out and walking away because they have risk with the guarantee. When a borrower tells a lender they are not willing to guarantee a loan, often times that is seen as a red flag for the lender in that the owner is not willing to stand behind their business. You as the owner are asking the lender to take on a lot of risk, especially if the business is highly leveraged, and because of that you need to take on risk as well. There is also a substantial amount of historical data that shows lenders lose substantially more money on un-guaranteed loans in default then on guaranteed loans, and that data also backs their desire to have personal guarantees. If you get an SBA 7A loan and stick with that loan, there is no circumstance in which the SBA will allow you out of the guarantee as the owner so long as you continue to own the business (meaning you do not sell 100% of your ownership interest to a partner and then get released from your guarantee). If you refinance in the future to another SBA 7A loan, all SBA 7A loans require personal guarantees. So that risk is not going away. There are some conventional lenders that will provide non-recourse / no guarantee financing. Most lenders, per their loan policies, will not even consider non-recourse financing for loans below a certain level, such as $5 or $10 or $15 million. Others will consider it, but it is an exception to their loan policy, which means it is rare they will do it. The times when lenders will consider such exceptions are usually if the following conditions exist: 1) The business has a long and consistent track record of revenues and cash flow 2) The debt service coverage ratio ("DSCR") is very high, usually 2.0x or better. 3) The loan is fully collateralized by business assets after normal advance rates, like equipment, inventory, accounts receivable, real estate, etc. 4) The business balance sheet is strong and the leverage ratio is low and there is plenty of equity on the balance sheet. Keep in mind, it is not usually hitting one of the above items for a deal to be considered for non-recourse financing. You usually need to hit all of these conditions So it is not easy to get non-recourse financing done on smaller transactions. Also, loans without recourse usually have some very strong financial loan covenants in place that allow the lender to call the loan early at the first sign of trouble so they can protect themselves if the business degrades at all. Usually the first thing the lender asks for if that happens to entice them not to call the loan early is the personal guarantee of the owners. If you have a larger transaction and you have a strong PE firm or large corporate guarantor with a strong balance sheet backing the deal, then you can likely get out of the personal guarantee. But it is because you have that other corporate support. I hope this helps to clarify the guarantee question that is asked quite often. Please keep in mind, just because you have signed a personal guarantee that does not mean the lender will pursue you personally for all of your assets if there is a default. There is a cost to trying to collect on a personal guarantee and there are lot of options to enter into a settlement (the SBA has a process called an "offer & compromise"), the Bank may just choose not to pursue you, or bankruptcy is always an option as well if you do not have much in the way of assets. If you have any additional questions you can reach me here or direclty at redacted

Reply by a professional
from University of Virginia in Holmes, NY 12531, USA

Very broadly: (1) have tremendously kickass free cash flow, (2) if relevant, consider asset-based lending approaches, (3) related to (2) but more generally, be able to show such high value collateral that a first priority security interest leaves the lender overcollateralized; (4) chat with alternative/mezz lenders who might take an equity kicker instead. Glad to discuss in more detail redacted All the best, Matt

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