What advantages do personal guarantees provide?
The main benefit of signing a personal guarantee is that it can increase your chances of getting approved for a business loan, especially if your personal credit score is strong. It also signals to the bank that you are ready to put your personal wealth on the line for your company. The term personal guarantee refers to a person’s legal promise to repay loans that were issued to a company for which they serve as an executive or partner. Providing a personal guarantee means that the individual assumes personal responsibility for the balance if the company is unable to repay the debt.
Personal guarantees provide an additional level of protection to loan originators who want to ensure they are repaid. A personal guarantee can reduce the lender’s financial investment risk and therefore offer more favorable interest rates to do business. Under a personal guarantee, a creditor has a legal right to the guarantor’s personal assets. This can include checking or savings accounts, cars, real estate, and other liquid assets.
A small business owner wishing to provide a guarantee on a loan typically needs to provide their own credit score and financial background, as well as their company’s credit information. Second, you should ask if you’ve read the details of your loan and the terms around the guarantee. However, if the company is struggling financially, you may be less interested in guaranteeing payments indefinitely. In general, it’s better to put collateral on a loan when possible than to put all your personal and business assets at risk with a personal guarantee or lien.
However, there are a few questions you can ask yourself to determine whether a personal guarantee is worth it. Before you sign this dotted line, make sure you fully understand what a personal guarantee is and what types of guarantees you can find most often in your business loan agreement. If you weren’t aware of any significant changes that were made to the setup, your warranty would be unenforceable. As you review your business loan agreement, you may be wondering whether a personal guarantee is worth the risk.
We’ll walk you through the basics of personal guarantees and the most important things to think about before you sign on the dotted line. Your business lawyer may even be able to override certain clauses in the contract and negotiate more consensual guarantee terms with the lender. Established companies with a long credit history may be able to purchase financing without a guarantee. Limited guarantees allow lenders to collect only a certain amount of money or a percentage of what’s left to pay if you default.
An executive can also pledge their own personal assets in current accounts, savings accounts, cars and real estate and agree to repay a debt from personal capital if the company defaults under its personal guarantee. A personal guarantee is a legal promise made by an individual to repay loans issued to their company with their own personal assets in the event that the company is unable to repay the debt. Anyone interested in a company of 20% or more must give the SBA an unconditional personal guarantee.