A guarantee occurs when a third party agrees to repay some debt if the borrower defaults. Company-owners are usually required by the bank to "personally guarantee" repayment of loans made to the company. The personal guarantee is important because it provides an extra method of repayment in case of default. The guarantee also helps keep the owner from being able to transfer funds to himself or herself, personally, to avoid repaying the bank. It also provides an important psychological advantage as well. If the business-owner stands to lose money or assets, personally, then he or she is more likely to work to make sure that the company pays its debts.

Related corporations frequently guarantee loans made to their owners or to other companies as well. Guarantees can be:

1. Unsecured or Secured: A secured guarantee occurs when the guarantor pledges some personal asset as collateral along with his or her guarantee. Asset pledges by guarantors frequently include residential mortgages, mortgages on company operating facilities, or stock in the borrowing company.

2. Unconditional or Conditional: A conditional guarantee follows some pre-specified condition such as the requirement that collateral must be liquidated before a guarantee can be enforced.

3. Unlimited or Limited: A limited guarantee could, for example, limit a guarantor's personal liability to his pro rata share of ownership of the company or to a certain dollar amount.