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When you sign a personal guarantee for a business loan, you are personally responsible for repaying the debt should your business fail to pay it. This means putting your personal assets at risk to secure financing for your business.
While there are some potential benefits to signing a personal guarantee – better loan terms or a higher chance of approval – borrowers should not enter into this type of arrangement lightly. Compare the options available and determine if a loan offer makes sense for you and your business before agreeing to sign a personal guarantee.
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What is a personal guarantee for a business loan?
A personal guarantee is a binding contract stating that the signatory is personally responsible for repaying the loan in the event of default. It provides lenders with an extra layer of security when making small business loans and allows them to take legal action against the guarantor if the business does not repay the loan. Lenders require personal guarantees for a range of business debts, including term loans, lines of credit and credit cards.
Under a personal guarantee, the guarantor’s assets can be used as collateral to secure loan repayment. This means that if your business defaults on a loan, your lender can go after your personal assets (such as bank accounts, cars, or real estate) before they can use your business assets.
While lenders typically require personal guarantees for business loans, this type of loan agreement can also help business owners qualify for financing. A personal guarantee reduces the risk the lender takes on, so eligibility requirements may be more flexible than for loans that do not require a guarantee.
How does a personal guarantee work for a business loan?
When signing a personal guarantee, the borrower is obliged to repay the business loan if the borrower’s business fails to repay the loan. The lender has the right to demand repayment from the guarantor when necessary. Depending on the size and terms of the loan, the lender may require more than one guarantor.
Some lenders require a personal guarantee even if they have sufficient collateral for a business loan. Lenders may also require business owners to personally guarantee unsecured business loans. This additional security helps protect lenders if the borrower defaults.
These are the two main types of personal guarantees:
- Unlimited Personal Guarantee. These guarantees require the guarantor to take full responsibility for the loan. This means that the guarantor is responsible for repaying the entire loan amount. So, if a business applies for a $200,000 loan, if the business cannot repay, the business owner guarantor must repay the entire outstanding loan.
- Limited Personal Warranty. A limited personal guarantee limits each guarantor’s risk and liability to a certain amount or percentage of the total loan debt. This may arise if a loan is guaranteed by four owners of a business. Guarantors may face “joint and several liability” under the loan agreement, which means the lender can seek repayment from one, some or all of the loan guarantors. For a $200,000 loan, each guarantor may be responsible for a quarter or the entire balance of the loan balance.
When do lenders require a personal guarantee on a business loan?
Most business lenders require a personal guarantee, but exact requirements vary by lender. Choose a lender that matches your business borrowing needs and matches your ability to repay the loan if the business defaults. Here’s how some common business lenders handle personal guarantees:
- government lender. Small Business Administration (SBA) loans require unlimited personal guarantees from business owners who own 20% or more of the company.
- traditional bank. Traditional banks typically require some form of personal guarantee for business loans. However, borrowers may be exempt from this requirement if they have a good credit score, enough collateral to secure the loan, and a history of good financial management.
- online lender. Many online lenders require personal guarantees for business loans. Read the loan agreement carefully to determine the type of security.
Do all business loans require a personal guarantee?
Most lenders require business owners to personally guarantee their business loans. But some lenders may be willing to waive that requirement if the business places a large deposit, provides a letter of credit or provides sufficient collateral to meet the lender’s criteria.
Before signing any documents, make sure you understand the details of the loan agreement and understand the potential risks involved with a personally guaranteed business loan. Take steps to fully understand the implications of signing a personal guarantee and ensure that you can personally repay the loan before committing to financing your business.
Can you get a business loan without a personal guarantee?
It is possible to obtain a business loan without a personal guarantee, but this may not be an option for all borrowers or all lenders. If you do not provide a personal guarantee, the lender will have no recourse against you in the event of default. Lenders compensate for this increased risk by imposing stricter financial requirements and charging higher interest rates.
What to Consider Before Signing a Personal Guarantee for a Business Loan
Whether you should sign a personal guarantee for a business loan depends on your specific circumstances, but there are a few key points to consider:
- Your eligibility and chances of approval. Getting a business loan is easier if you are willing to sign a personal guarantee. However, qualified business owners may qualify for competitive rates without needing to secure the loan. Evaluate your chances of approval against each lender’s requirements to see if you qualify for no security.
- business financing needs. Evaluate the risks of signing a personal guarantee versus the potential benefits of obtaining a loan. Do your due diligence to ensure that the loan is necessary for business growth and that you are not borrowing more than necessary.
- Availability of commercial collateral. Businesses with substantial assets such as equipment or real estate can avoid personal guarantees by pledging some valuable collateral. Depending on the circumstances, secured loans may be beneficial to sign a personal guarantee.
- Your business’ ability to repay the loan. Before applying for a loan, carefully consider your business’ cash flow and ability to meet its repayment obligations. Make sure the business has enough funds to cover the loan.
- Lender’s requirements. Find out what your lender requires of each guarantor and decide if a personal guarantee is right for your situation.
- own repayment ability. Even if you think your business can handle the debt, make sure you can personally pay the loan amount in the event of default. Consider your savings and other assets that you can use to pay off debt if necessary. Also consider whether you can replace assets at risk with a personal guarantee.
If you decide to sign a personal guarantee for a business loan, make sure you understand the terms of the agreement and how it can affect your financial situation. Research and compare different lenders and products before signing the loan documents so you can secure the best deal for your business.
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