Personal Guarantee on an Operating Line of Credit: What Canadian Business Owners Sign

A personal guarantee on an operating line of credit is the document many owners sign on closing day without a second read. It matters more than the credit agreement. The line is for the business. The guarantee is for you.

This post covers business owners in Canada outside Quebec who have, or are applying for, a revolving line of credit from a bank, credit union, BDC or alternative lender. It is educational, not legal advice.

Do I need a personal guarantee on an operating line of credit?

Usually, yes. A line of credit lets the business borrow, repay and borrow again up to a set limit. The lender is lending against a business that can change quickly. A personal guarantee gives the lender a second source of repayment: you.

Even a line backed by receivables or inventory often comes with one. Lenders differ. Some will accept a limited guarantee, or none. You will not know until you ask.

Government-backed lines work the same way in principle. The Canada Small Business Financing Program lets lenders take personal guarantees, within limits set in the program rules (ISED, program guidelines, check the current year).

What is a continuing guarantee, and is it limited or unlimited?

A continuing guarantee covers a running balance, not one loan. That fits a line of credit, because the balance moves every week. The guarantee stays in force while the line stays open, until it is released in writing.

Many are also unlimited. That means no dollar cap on what you owe under the guarantee. The amount can include the principal, interest, fees and the lender's collection costs.

Here is the part owners miss. The line may be CAD $250,000 today. A guarantee written as unlimited may not be tied to that number. Read it for three things:

• A stated maximum amount, or none.
• Whether interest and enforcement costs sit inside or on top of that maximum.
• Whether it covers only this line or every debt the business owes the lender.

That last point is the one to push on. A guarantee of all present and future debts can follow you into products you never discussed. For the full comparison, read unlimited vs limited personal guarantee.

Can a lender call my line of credit?

Often, yes. Many operating lines are demand facilities. That means the lender can ask for repayment at any time, even when you are current. Check your offer letter for the words payable on demand or repayable on demand.

The law does give you some protection. In Lister v. Dunlop Canada Ltd. (Supreme Court of Canada, 1982), the Court held that a lender must give reasonable notice before enforcing a demand debt. What is reasonable depends on the facts. A demand for payment right now was found not to be enough. Where the lender wants to enforce security over most of the business assets, section 244 of the federal Bankruptcy and Insolvency Act requires notice of at least 10 days (Government of Canada, Justice Laws).

So a lender cannot call the line with no warning. But a demand can still land when the business has little cash, and then the lender can turn to your guarantee.

What happens to my guarantee when the line renews or increases?

This is where owners get caught. Many continuing guarantees say they apply to the line as renewed, amended, increased or replaced. If so, the lender may not need you to sign again when the limit goes up. You can end up guaranteeing a larger line than the one you first agreed to.

Not every guarantee is written that way. Some are tied to a stated limit, and a new limit needs a new signature. Which one you have is a matter of the wording. We have not seen your documents, and a lawyer should read them.

At each renewal:

• Ask for a copy of the guarantee you signed.
• Compare the current line limit with the amount in the guarantee.
• Ask whether the increase needs your signature, or whether the old guarantee already stretches to cover it.
• Check whether you can give notice to end future liability. Notice usually does not remove debt that already exists.

How do I get released from a personal guarantee on a line of credit?

A release comes from the lender, in writing. The business paying down the line is not the same as a release. If the line stays open, the continuing guarantee usually stays with it.

The usual routes are these: the line is repaid and closed, the lender agrees to swap you out, the guarantee is replaced by security or another guarantor, or the business is sold and the buyer's lender refinances. Each needs the lender to agree. For the steps and timing, read personal guarantee release: when and how.

Should I offer collateral or a personal guarantee for a working capital loan?

Neither is free. Collateral puts a named asset at risk. A personal guarantee puts what you own at risk, up to the guarantee amount. Collateral is usually the narrower of the two, if the lender will take it in place of the guarantee.

Many lenders want both. If you have a choice, weigh three things: how easily the asset can be valued and sold, whether the guarantee has a cap, and how a loss would reach your family. Ask for the guarantee to be limited and for its end date to be written down. The same logic applies to a working capital loan as to a line. Before you decide, use the questions in questions to ask before you close.

Where does Personal Guarantee Insurance fit?

Personal Guarantee Insurance (PGI) is a claims-made insurance policy held by the director who signed the personal guarantee. It caps the personal loss. It does not stop the business from failing, it does not prevent default, and it does not protect all of your assets. Cover is written against a specific personal guarantee on a real business loan, and whether a given line of credit guarantee qualifies depends on the application.

In Canada outside Quebec, no one else offers Personal Guarantee Insurance. Here is how a claim works under the policy. It responds only when four things have happened: the company has entered an insolvency procedure, that procedure has concluded, the insolvency professional has realised the assets and distributed the proceeds, and the lender, after negotiation, has made its final request for settlement under the guarantee. The insurer then pays the named insured, who pays the lender. The payment is the lender's final amount demanded, up to the sum insured, less your own contribution (a set percentage shown in the schedule), and less any documented amount you or a related company owes the company. The insurer never pays the lender directly, and the lender cannot be named on the policy or start a claim. A claim needs a real loan and the intent to pay the lender.

Because it is claims-made, cover is tied to an active policy period and timely reporting. A policy that has lapsed or been cancelled cannot take a new claim. Read the full detail on the Personal Guarantee Insurance page.

By PGicover Editorial. Educational content only; not legal advice. Personal Guarantee Insurance is available in Canada outside Quebec, subject to the policy wording and underwriting.