What are personal guarantees in business financing?

Personal guarantees in business financing refer to commitments made by business owners to personally repay loans if their business is unable to fulfill its financial obligations. This means that the individual’s personal assets can be at risk if the business defaults on the loan. Lenders often require personal guarantees as a way to mitigate risk, ensuring that there's a personal stake in the success of the business.

When a business owner signs a personal guarantee, they are essentially putting their reputation and personal finances on the line to gain access to credit or financing for their business. This arrangement provides an added layer of security for lenders, who may be hesitant to finance a business that does not yet have a strong credit history or sufficient collateral.

In contrast to the correct option, the other choices discuss different concepts. For instance, commitments made by friends to fund a business usually involve informal investment or support, rather than the formal financial obligations tied to loans. Legal agreements that protect investors' interests pertain to investment contracts or shareholder agreements, which do not focus on the personal liability of business owners. Assurances regarding a provider delivering products on credit deal with trade credit and the terms of purchasing supplies, which is separate from the personal liability associated with financing agreements.