What Does Personal Guarantee Mean for a Business Loan?
If you are looking to get your hands on a business loan for either a startup or a current business, you may have heard the term personal guarantee before. This article will help clarify what a personal guarantee is, along with some of the pros and cons associated with it.
What Is a Personal Guarantee?
The term personal guarantee is used within a legal loan agreement between lenders and business owners. The term is used to ensure repayment of business loans or lines of credit in the form of personal assets. They do not typically require specific collateral, which makes them easier to get.
In a typical scenario, these types of agreements are used for small businesses or startups who have inadequate credit history for a business loan. To increase the chance of approval on an application, a personal guarantee acts as a co-signer to a business loan. In the case that a business fails and your loan defaults, you are the guarantor, and the lender has the right to come after your personal assets.
Different Types of Guarantees
There are a few different types of personal guarantees. The most common one used is an unlimited personal guarantee (unconditional guarantee). This would mean that borrower is responsible for the full amount of the loan repayment, plus any legal fees. An example of this is the Small Business Administration’s loan program. Many SBA loans require unlimited personal guarantees from any of their borrowers with 20% or more stake in a business.
Additionally, there are limited personal guarantees, which are more flexible and lenient. This type of guarantee sets a limit on the amount of money a lender can come after a borrower for in the event of business default. Beware that this type of guarantee may sound great, but with failure to make payments, business lenders can come after other specific assets such as bank accounts, real estate, or vehicles.
Within limited personal guarantees, there are subcategories such as several guarantees or joint and several guarantees. These types of guarantees are more common with multiple business partners, as each partner would each be required to repay a determined amount of the loan.
Pros and Cons of a Personal Guarantee
Depending on the situation that you and your business are in, a personal guarantee may be something that could either harm of benefit you.
Some fo the pros include:
- Not having your small business loan tied to specific assets or collateral
- Personal guarantee will improve your chance of approval
- It may help you get better interest rates
Some of the cons include:
- Risk losing personal assets later down the line
- Long term effect (e.g. bankruptcy) if your business fails
- Stress on personal finances (e.g. bank account savings)
Will It Hurt My Credit Score?
The good news is no, a personal guarantee typically will not affect your personal credit. If you make payments on time, your credit should remain fine.
However, failure to make payments or default on a loan will be reflected on your credit report, which will in turn affect your credit score.
Final Take-Away About Personal Guarantees
A personal guarantee can also be seen a personal loan and a personal liability. As a borrower, you are required for the repayment of any business debts associated with your business. If you are a new business, you may way to evaluate all of the pros and cons carefully, to avoid harm later down the line.
However, personal guarantees can help business financing and help improve a business in the long term. Before signing any documents, it is important to evaluate your personal situation to see if you are fit to ensure a personal guarantee.
About Financing Solutions Business Line of Credit
Financing Solutions business line of credit costs nothing to set up, nothing until used and when used, is inexpensive. The credit line requires no collateral and no personal guarantees.
Organizations will set up the line of credit in advance so that if there is ever any cash flow issues, you will have a cash back up plan. The time to set up a credit line is when you don’t need it so that it is ready to be used, just in case.
If you would like to see if your organization would-be approved and for how much, please feel free to fill out the no-obligation, 2-minute line of credit application here.