Everything You Need to Know About Personal Guarantee
When you apply for a traditional bank loan, a business line of credit, an SBA loan, or some other secured small business loan, you may have to pledge an asset as collateral to secure the funding. In fact, many lenders will require you to sign a personal guarantee if your business lacks a perfect credit history.
Though in the absence of a perfect credit score, good annual revenue, and a positive cash flow, a personal guarantee may increase your chances of obtaining a loan, you shouldn't race into marking it without first agreeing on what it involves.
In this post, we’ll explain what is a personal guarantee and share some of the important things you need to know about it.
What’s a Personal Guarantee?
A personal guarantee refers to a small business owners’ legal promise to repay the borrowed funds with its personal assets if he/she defaults on the loan. The personal guarantee can be secured or unsecured, meaning you may or may not require to pledge an asset as part of the guarantee. However, lenders can seize your assets to recoup the losses if you can’t make debt repayments.
Why Lenders Require a Personal Guarantee?
Providing a huge amount to businesses with limited or no credit history is a big risk for lenders. So a personal guarantee protects the lender in a situation where a business owner is unable to pay back the borrowed funds.
What are the Benefits of a Personal Guarantee?
The biggest advantage of a personal guarantee is that if you fail to meet the minimum qualification requirements of a small business loan, it can increase your chances of being approved for the funds. It also signals to the lender that you’re willing to put up your personal assets on the line for your business.
Besides, providing funding for small business owners with poor credit history can be risky. Therefore, a personal guarantee from borrowers can lower the risk that lenders incur.
What are the Risks Associated with a Personal
Guarantee?
The obvious risk of signing a personal guarantee is that if you default on the loan, you can lose your valuable asset. Depending on the amount you borrowed, you could lose your real estate, house, car, personal savings, and other assets you submitted as collateral. So, it’s important to know if the asset is valuable for you or if you can afford to lose it.
If you fail to repay the borrowed amount with your personal assets, your lenders can take legal action against you. Moreover, it can damage your credit score, making it difficult to secure funds in the future.
Should you Sign a Personal Guarantee?
Well, deciding whether you should sign a personal guarantee or not depends on your business creditworthiness and the personal assets you’re willing to put on the line. If you are a profitable business with a good credit history and annual revenue, you will find a plethora of loan products that don’t require a personal guarantee.
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