TL;DR: A personal guarantee is a commitment by an individual, usually a founder or director, to repay a company's debt personally if the business cannot. It exposes personal assets to business risk. Some growth-focused lenders, including Flow Capital, do not require personal guarantees.
A personal guarantee makes an individual personally liable for a company's loan. If the business defaults and cannot repay, the lender can pursue the guarantor's personal assets. Lenders use guarantees to reduce their risk, particularly where a company's own credit profile is thin. For the founder, a guarantee blurs the line between business risk and personal risk, which is precisely what incorporating a company is normally meant to separate.
Requirements vary by lender. Some growth lenders ask for personal guarantees; many do not. Flow Capital does not require personal guarantees. Its facilities are underwritten against the company's revenue and growth rather than secured by a founder's personal assets, which keeps business risk where it belongs, with the business.
Does venture debt require a personal guarantee? It depends on the lender. Some require one; others, including Flow Capital, do not.
Why do founders want to avoid personal guarantees? Because a guarantee puts personal assets at risk for business obligations, removing the separation that incorporating a company is meant to provide.
Related terms: Covenant · Venture Debt · Default · Due Diligence
