Personal Guarantees in Equipment Loans: What to Know

You’ve found the right equipment. You’re approved for the lease or loan. Then the lender says:

“We just need a personal guarantee to move forward.”

This is a moment that catches many entrepreneurs off guard.

If you're financing as a small business, especially a new one, it's common for lenders to ask the owner to sign a personal guarantee. But what does that really mean? And how much personal risk are you taking on?

In this guide, we’ll break it down in plain terms:

• What a personal guarantee is
• When and why lenders ask for it
• How it affects your personal credit and liability
• Ways to protect yourself and limit exposure
• A real-world example that shows how to handle it smartly

What Is a Personal Guarantee?

A personal guarantee is a legal promise that you (as the business owner or director) will personally repay the loan if your business cannot.

If the company defaults, the lender can come after your personal assets—including savings, personal income, or property (depending on the province and structure).

Think of it as a “backup signer” behind your business, especially if your company is new or lacks a strong credit file.

Why Do Lenders Ask for It?

Most Canadian lenders require a personal guarantee when:

• The business is new or has under 2 years of financials
• There’s limited business credit history
• The equipment has low resale value or niche use
• You're borrowing over $25,000 without significant collateral

In short: lenders want added confidence that someone is on the hook—especially when there’s uncertainty about your business’s ability to repay.

How a Personal Guarantee Affects You

✅ Pros:

• Helps secure financing when business credit alone won’t cut it
• Opens doors to larger loan approvals or better terms
• Keeps the financing tied to business use—not personal lines of credit

⚠️ Considerations:

• If the business defaults, you’re personally liable
• Missed payments can impact your personal credit
• You may be subject to collections or legal action
• It can affect your ability to get future personal loans or mortgages

Types of Personal Guarantees

Not all guarantees are equal. Ask your lender what kind you're being asked to sign:

Tip: Always read the fine print—or have your lawyer review it—before signing a PG (personal guarantee).

Real Case Study: Using a PG to Unlock Growth

Business: New HVAC company in Alberta (8 months in)
Need: $68,000 for vehicle + refrigeration equipment
Challenge: No business credit history yet

Solution:

• Owner provided an unlimited personal guarantee
• Approved on a 48-month lease, fixed 11.9% rate
• Equipment and vehicle held as security
• Lender agreed to review PG after 12 months of on-time payments

Outcome:
Business grew rapidly. After one year, owner refinanced under business-only terms and had the PG removed.

How to Protect Yourself When Offering a Personal Guarantee

Even if it’s required, you can still negotiate or manage the risk:

✅ Ask for a Limited Guarantee

Negotiate a cap—for example, 50% of the loan value or a specific amount.

✅ Set a Review Period

Request that the guarantee be reviewed and potentially removed after 12–24 months of good payments.

✅ Separate Personal and Business Finances

Avoid co-mingling accounts to reduce exposure in worst-case scenarios.

✅ Keep Insurance and Equipment Maintained

If the asset is repossessed, the better its condition, the higher the resale value—and the lower your exposure.

✅ Don’t Co-Sign Lightly

If you’re being asked to guarantee a loan for a business you don’t fully control, understand the consequences. You’re liable regardless of your role.

FAQs: Personal Guarantees in Canadian Equipment Financing

Can a lender repossess my personal assets?
Not directly. They would need to obtain a court judgment against you if the business defaults and the loan is personally guaranteed.

Does a PG appear on my credit report?
Not unless the business defaults. If the loan is repaid on time, your personal credit typically remains unaffected.

Can I get financing without a PG?
Sometimes. If your business is established, has strong credit, or the equipment is very low risk, you may avoid it—but it’s rare for startups.

Can the PG be removed later?
Yes—some lenders allow for PG removal after consistent repayment, especially if you refinance with a stronger business credit profile.

Final Word: A Common Tool—But Know the Risks

Personal guarantees are a standard part of small business financing—especially for equipment loans. But standard doesn’t mean simple.

Understanding what you're signing—and how to protect yourself—can make the difference between financing that fuels growth and a surprise liability later on.

At Mehmi, we always explain personal guarantee terms upfront and look for the lowest-risk structure possible based on your situation.

Want help securing financing with minimal personal risk?
Speak to a credit analyst or use our calculator to model payment plans and guarantee scenarios.

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