As a business owner, you may find yourself needing a loan to help grow your business. However, getting a loan from a lender is not always easy, especially when you have little or no credit history. This is where a personal guarantee can come in handy. In this article, we’ll be exploring everything you need to know about business loans with personal guarantees, including what they are, how they work, and whether they are the right option for your business needs.
What Is a Personal Guarantee?
A personal guarantee is a legal agreement in which an individual takes responsibility for a loan on behalf of a business. Essentially, it means that if the business is unable to repay the loan, the individual who signed the guarantee will be held personally responsible for the debt. This can include the seizure of personal assets or the filing of a lawsuit against the guarantor.
How Does a Personal Guarantee Work?
A personal guarantee is typically required when a lender is uncertain about a business’s ability to repay a loan. By providing a personal guarantee, an individual can help secure the loan and increase the chances of approval. If the business is unable to repay the loan, the lender can then pursue the guarantor for repayment.
What Are the Types of Personal Guarantees?
There are two types of personal guarantees: unlimited and limited. An unlimited personal guarantee means that the guarantor is fully liable for the entire amount owed, plus interest, fees, and other costs. A limited personal guarantee, on the other hand, limits the guarantor’s liability to a specific amount or percentage of the loan.
Who Can Sign a Personal Guarantee?
Anyone who has sufficient assets or income can sign a personal guarantee. This includes business owners, partners, directors, or anyone else who has a financial stake in the business.
Why Do Lenders Require Personal Guarantees?
Lenders require personal guarantees as a way to mitigate their risk. By securing a personal guarantee, lenders can feel more confident about approving a loan to a business with little or no credit history.
What Are the Risks of Signing a Personal Guarantee?
The main risk of signing a personal guarantee is that you will be held personally responsible for the loan if the business is unable to repay it. This can include the seizure of personal assets such as your home, car, or bank account, as well as damage to your credit score and reputation.
What Are the Benefits of Signing a Personal Guarantee?
The benefits of signing a personal guarantee include increased access to loan funding, improved interest rates, and more favorable repayment terms. In addition, signing a personal guarantee can help establish credit history for the business and increase its chances of securing future loans.
Business Loan with Personal Guarantee Table
Loan Type |
Interest Rate |
Repayment Terms |
Guarantee Type |
Guarantor Liability |
|---|---|---|---|---|
Term Loan |
6-12% |
1-5 years |
Limited |
Up to 25% of loan amount |
SBA Loan |
4-8% |
Up to 25 years |
Unlimited |
Full loan amount plus interest and fees |
Line of Credit |
9-16% |
Revolving |
Limited |
Up to 50% of credit limit |
Frequently Asked Questions
1. What happens if I default on a loan with a personal guarantee?
If you default on a loan with a personal guarantee, the lender can pursue the guarantor for repayment. This can include the seizure of personal assets or the filing of a lawsuit against the guarantor.
2. Can I get a loan without a personal guarantee?
It may be possible to get a loan without a personal guarantee, but it can be difficult. Most lenders require some form of collateral or guarantee to mitigate their risk.
3. How does a personal guarantee affect my credit score?
If the business defaults on the loan, the guarantor’s credit score can be negatively impacted. However, as long as the loan is repaid on time, it should have a positive effect on the guarantor’s credit score.
4. What should I consider before signing a personal guarantee?
Before signing a personal guarantee, it’s important to consider the risks involved and whether you have sufficient assets or income to repay the loan if the business is unable to do so.
5. Can I negotiate the terms of a personal guarantee?
It may be possible to negotiate the terms of a personal guarantee with the lender. However, this will vary depending on the lender and the specific loan.
6. Are personal guarantees required for all business loans?
No, personal guarantees are not required for all business loans. However, they are often required for loans to businesses with little or no credit history.
7. How long does a personal guarantee last?
A personal guarantee typically lasts for the duration of the loan repayment term.
8. What is the difference between an unlimited and limited personal guarantee?
An unlimited personal guarantee means that the guarantor is fully liable for the entire amount owed, plus interest, fees, and other costs. A limited personal guarantee, on the other hand, limits the guarantor’s liability to a specific amount or percentage of the loan.
9. Can I transfer the personal guarantee to someone else?
It may be possible to transfer the personal guarantee to another individual, but this will vary depending on the lender and the specific loan.
10. What should I do if I can’t make payments on a loan with a personal guarantee?
If you are unable to make payments on a loan with a personal guarantee, it’s important to contact the lender as soon as possible to discuss your options. This may include restructuring the loan or negotiating a payment plan.
11. How can I improve my chances of getting a loan without a personal guarantee?
You can improve your chances of getting a loan without a personal guarantee by improving your credit score, increasing your revenue, and building a strong business plan.
12. Can I have multiple personal guarantees for different loans?
Yes, it is possible to have multiple personal guarantees for different loans.
13. What should I do if I am asked to sign a personal guarantee for a loan?
Before signing a personal guarantee, it’s important to carefully consider the risks involved and whether you have sufficient assets or income to repay the loan if the business is unable to do so. You should also consider negotiating the terms of the guarantee with the lender if possible.
Conclusion
Overall, a personal guarantee can be a useful tool for securing a loan when you have little or no credit history. However, it’s important to carefully consider the risks involved and whether you have sufficient assets or income to repay the loan if the business is unable to do so. If you do decide to sign a personal guarantee, be sure to negotiate the terms with the lender to ensure that you are protected to the greatest extent possible.
Take Action Now
If you’re interested in getting a business loan with a personal guarantee, don’t hesitate to start exploring your options. Contact lenders in your area to discuss your needs and learn more about the application process. With the right preparation and planning, you can secure the financing you need to help your business thrive.
Closing Disclaimer
The information provided in this article is for general informational purposes only and is not intended as legal or financial advice. You should always consult with a qualified professional before making any financial or legal decisions.