Personal guarantees in CNC equipment financing: what you need to know

Yes — most CNC equipment financing requires a personal guarantee (PG), a written promise that you'll repay the loan from your personal assets if your shop defaults. A personal guarantee is "a borrower's promise to repay a business loan from their personal assets if the business defaults". For most machine-shop owners, signing one is the price of getting funded.

The one common exception: because the CNC machine itself is collateral, some equipment lenders will lean on the asset instead of you. As OnDeck notes, "Loans specifically for purchasing equipment may not always require a personal guarantee if the equipment itself serves as sufficient collateral." Newer, liquid machines with strong resale value give you the best shot at reducing or removing the PG.

When a personal guarantee is required

If your financing involves the SBA — common for larger or longer-term machine purchases — a guarantee is non-negotiable for principal owners. "The Small Business Administration requires unlimited personal guarantees from borrowers who own 20% or more of a business applying for an SBA loan." Bankrate confirms it bluntly: "Any business owner who owns at least 20% of the business must provide an unlimited personal guarantee." Outside SBA programs, most private equipment lenders still ask for a PG on younger shops or thinner credit, regardless of the collateral.

Unlimited vs. limited, and joint-and-several liability

Guarantees come in two flavors. An unlimited (unconditional) guarantee means "an individual guarantor is responsible for paying everything owed to the lender until the loan is paid in full." A limited guarantee caps your exposure — a "limited guaranty will hold a guarantor liable only up to a specified amount of debt, up to a certain point in time, or only on certain specified loans."

If your shop has multiple owners, watch for joint and several liability. It means "the lender can hold each individual guarantor liable for the full amount of the borrower's obligation" — and the lender "can choose to sue only one or any number less than all of the guarantors for that full amount." A 25% partner can be chased for 100% of the balance, then has to recover from co-owners on their own.

How to limit your exposure

You have more leverage than you think before signing:

• Lead with collateral. Pledging the machine and other business assets can shrink the lender's need for a PG, since "Loans secured by business assets, such as equipment ... may not always require a personal guarantee if the collateral is sufficient to cover the loan amount."
• Negotiate a limited guarantee. OnDeck advises borrowers to "limit liability by negotiating the extent of the guarantee or exploring alternative arrangements." With co-owners, push for each person's liability to be capped at their ownership percentage rather than the full amount — the National Law Review notes negotiations can tie "each owner-guarantor's liability ... to a percentage of the borrower's obligations equal to ... each guarantor's percentage of ownership interest."
• Read every clause and get advice. Confirm whether it's joint-and-several, whether it survives a refinance, and what triggers it.

Weigh the PG against the structure of your deal. See our overview of personal guarantees on business loans and how secured equipment loans for CNC use the machine as collateral, then compare against standard CNC equipment loans.

Sources

• NerdWallet — Personal Guarantees for Business Loans
• National Law Review — Pitfalls of Personal Guaranties
• Bankrate — SBA Loan Collateral vs. Guarantee
• OnDeck — Understanding Personal Guarantees