At some point, most companies will investigate obtaining a loan for business purposes, whether you are just starting your business, launching a product, or looking to expand your operations. If you are looking into business loans, there is a good chance that you will need a personal guarantee.
Personal guarantees are required for many types of business loans. What is a personal guarantee exactly? What are the pros and disadvantages of a personal guarantee? Is a personal guarantee right for your small business? Get Started
What’s a personal guarantee?
Personal guarantees are a part of a loan agreement. They make the business owner and any co-signers personally responsible for the entire loan amount if the entity cannot or fails to repay the debt.
Personal guarantees let lenders target your personal assets if your business cannot repay the loan. Lenders have the option to use personal guarantees to protect their assets if you fail financially.
Why would lenders require a personal guarantee?
It can be risky to lend money to small businesses, especially if the business is new and has no credit history. Lenders are less likely to lend to small businesses if they have personal guarantees. With personal guarantees, lenders feel more comfortable lending to them, even if the company is unable to pay the debt.
Personal guarantees are a way for lenders to lend capital to small businesses more attractively. Therefore, many loans, such as many Small Business Administration loans (also called SBA loans), also require them.
What types of personal guarantees are there?
There are several types of personal guarantees available. Each one carries a different risk to the business owner.
An unlimited personal guarantee is the first. An unlimited personal guarantee, while the riskiest option for the lender, is the best option for the business owner. An unlimited personal guarantee means that you are responsible for the entire loan amount. The lender may take over your personal assets, such as your home, car or other real estate, to recover their investment and pay the balance.
A limited guarantee is the less risky option available to borrowers. This personal guarantee, as the name implies, limits your liability and limits the amount that you would owe to the lender if your business is unable repay the loan. A limited guarantee allows you to agree with the lender a collateral value that can be taken from your personal assets in case your business is unable to repay the loan.
There are additional guarantees for business partners: several guarantees, joint guarantees, and multiple guarantees.
Each stakeholder of your business has a certain percentage of responsibility for the business loan. If your business defaults on payments, then each stakeholder in your business could be responsible to pay 25%.
If the other stakeholder cannot repay their share, they are responsible for the entire loan amount. If you sign a joint guarantee with your business owners, but they are unable to repay the loan, what happens? Your personal assets would have to be used to pay their share.
Joint and multiple guarantees are much riskier than several guarantees. If your partners cannot cover their part of the business debt you would be responsible to pay back 100%.
What are some of the risks and benefits of signing a guaranteed agreement?
It is important to fully understand the risks and benefits of signing a personal warranty before you decide whether it is right for your business.
The benefits of signing a guarantee
Signing a personal guarantee has many potential benefits, including:
A personal guarantee may make it easier to get capital. If you are a new company, have no credit history or have little business assets, it can be difficult to get the capital you need. A personal guarantee can make you more attractive to lenders and help you get the capital you need.
A guarantee can help you get more business loans. Although there are many business loans that do not require personal guarantees, there are a large number of business loans that do. A personal guarantee will give you a greater range of loan options for your business.
A guarantee can help you get better terms on your loan. Personal guarantees reduce risk for lenders and can often be used to get better terms.
Personal guarantees do not require collateral or assets. Some loans require collateral or an asset to be secured. Personal guarantees offer greater flexibility. You must repay the loan if your company defaults. However, you do not have to pay any particular asset.
There are many benefits to signing a guarantee. There are, however, some risks. There are some risks involved in signing a personal guarantee to your business loan.
The risks of signing a guarantee
Your personal assets could be at risk. When you sign a personal warranty, your personal assets may also be at risk. Your lender could seize all of your personal assets, such as your home and car, if your business fails to repay the debt.
Your credit score is also affected. Personal guarantees tie your personal finances to the business’s. Your personal credit could be affected if your business defaults on the loan. This could make it more difficult to get a personal credit card or line of credit, mortgage, loan, or other financial product in the future.
The assets of your spouse could also be at risk. Personal guarantees may also require the signature of the spouse. If you are unable to pay your loan, your spouse could be forced to surrender any assets.
Do your homework before you decide if a guarantee is right for your business
There is no right or wrong way to answer the question of whether you should sign a personal loan guarantee for your company. It will depend on your business and the terms of your loan.
Do your homework and consider your options before you decide about whether a loan for business is right for you. Consider the terms and conditions of the loan and the terms and risks of signing the personal guarantee.
Understanding the terms of your loan will help you to evaluate whether it is right for your business and long-term success.