When you sign a personal guarantee on a business loan, you are liable to pay the dues if business sales cannot. It implies the lender asks for a personal guarantee if the business lack sufficient capital and years of operating and requires a flexible amount for business requirements. Thus, lenders mandate personal guarantees to abate any risk of losing their capital.
What does a personal guarantee on a business loan imply?
A personal guarantee is a legal contract signed between the loan provider and the business director. If the business fails to pay the loan amount with the interest rates, he would be liable to pay with his personal assets before the lender taps business assets. It grants lenders extra security, especially on long-term business loans.
The lender shares the right to take judicial action against loan non-repayment and denial to pay the dues with a personal guarantee. In a personal guarantee, the guarantor’s assets operate as collateral. These are also known as guarantor business loans. Here, the directors act as a guarantor and guarantee to pay the dues with personal assets. There can be multiple guarantors on the loan, including CEOs and business partners.
Personal guarantees are unsecured. If one cannot pay, the lender may go for personal assets.
Can a lender enforce a personal guarantee?
Lenders generally require a personal guarantee as a secondary security on the loan. If the guarantors of business owners fail to repay, the assets act as a second security.
The lender first identifies whether the business can pay the dues or not. If not, he can rightfully claim the personal assets acting as a guarantee on the loan. Nevertheless, every situation is unique and several factors influence whether a guarantee is required.
In what situations lenders cannot enforce a personal guarantee?
There are certain situations where a lender cannot enforce a personal guarantee:
- Unclarity on the part of the agreement that the lender provided
- You were misled by the loan provider while signing the guarantee
- Any term in the contract that you find unfair
Thus, go through the agreement before signing it up. Once you find the co-guarantors name and other specifics, send your approval.
What are the benefits of having a guarantor-based loan?
There are multiple benefits of guarantor loans. Even if a business has a low credit history, it may benefit from a guarantor loan in the below ways:
1) Can fetch a higher sum without paying extra
It is ideal for low-credit businesses needing a flexible amount to meet their requirements. A personal guarantee can help you fetch a higher sum for low-interest rates. Here the lender has limited risks. Finding such lenders is struggling when you need a loan immediately. But with the help of leading brokers, you can do so. They help you find the right deal for your credit and finances.
2) Businesses needing a long-term loan may qualify easily
It is important to ensure a sufficient guarantee to repay the loan. For example, if you need it for the long term, the lender would demand you to have a guarantor or place your asset as a guarantee. The business probably has low- credit with insufficient capital to block the deal.
However, you may get a quick loan if you or your business partner guarantee to pay the loan with your personal or business assets without any sales figure.
3) Beneficial for businesses with insufficient trading history
Startups, self-employed, and businesses with less than 6 months of operating history may benefit from a personal guarantee. Getting an instant quote with no or limited operating history and capital is simply impossible.
However, one may qualify for a substantial sum with a guarantee. New businesses with good planning generally have assets. If you want, you may go for a secured guarantor loan. It is because, without sufficient sales, you cannot qualify based on revenue.
Is it ideal to go for personal guarantees for business loans?
Taking up a personal guarantee on the business loan is a crucial decision. You should have sufficient confidence in the business to approach it. You may opt for it if you believe in profit generating and paying the repayments comfortably. The decision is big as a business director stakes the profit and company assets to get the loan. The economic situation regulates the business and its profit margin. Here are some signs that opting for a personal guarantee may be beneficial for your business:
a) You have projects in the backup
Analyse the way to pay for the loan. You can save your assets if you clear the dues by business sales. Thus, it is important to have sufficient clients. It may not be a good idea if you lack the same or have not got any clients in the past 3-4 months. Likewise, if you have a stellar client backup and share trust among them, you can pay it with the next revenue. In this case, the loan would be ideal.
- Need a large lump sum with fair credit
You may qualify for a large lump sum by acting as a guarantor on the business loan. Here fair credit implies your financial management. If you have no pending loans, complete payrolls, or paid equipment finance with incredible personal credit history, check guarantor personal loan. You may qualify for an amount nearing the one with good credit history.
- You lack business assets
It is important to consider asset value if you have low business history. If you have, you can go for the guarantor finance. However, make sure to pay the loan timely, or you may lose the asset.
When a personal guarantee business loan may not be the best thing for you?
Likewise, a personal guarantee loan may not be ideal for you in the following circumstances:
- You have a low credit history
- You do not have sufficient history, nor are you willing to be a guarantor
- You do not want to risk the personal and business assets
- Your business is not working fine
- You have pending dues from clients
There can be many reasons behind approaching or dropping the personal guarantee aspect of a business loan. However, wrong decisions may impact your business significantly. Thus, contact the best business finance brokers to know the right prospects for your business with personalized consultation and guidance. Get the right lender for your financial requirements and eliminate risks.
Personal guarantees are preferable for businesses with consistent revenue seeking additional finance. Improvise the prospects and decide right for your business. The purpose of availing of the loan should be clear to benefit from it the most.
Harry Kane is a financial writer and author who has covered wide topics related to business loans and finance for the last decade. He has been working as the Chief Contributor in finding out deals on various business finance products covered by Thebusinessfunds, a reputed business loan broker firm in the UK. The primary work of Harry is to analyse the loan requirements of various businesses according to their circumstances and affordability. He directly communicates with the loan aspirants and guides them to get the right loan matching their needs. He has a vast experience in finance writing, working with many major business firms in the UK. At Thebusinessfunds, Harry also used to write well-researched blogs covering the financial problems of business loan aspirants and providing relevant solutions. He is a postgraduate with MSc. in Banking and Finance.