When it comes to giving loans, the potential lender needs assurance that the loan will be repaid on time. That’s where personal guarantees on business loans come in. One can only make a personal guarantee if they are a partner in the business or an executive.
What’s Exactly is a Personal Guarantee on Business loan?
Personal guarantee on business loans involves making a promise that you’ll be accountable for the business loan repayment. You’ll have to sign an agreement and commit to repaying the loan individually if the business fails to repay. In short, it’s like being a co-signer on your business loan.
The lender may require a binding agreement, and this applies even if the business is not directly connected to you. In case the corporation can’t pay the debt, the lender will activate your personal guarantee.
You can secure a personal guarantee with personal assets such as home equity. Also, it can be unsecured, but that will depend on the lender. But in both cases, the individual guaranteeing the business loan is held accountable if the business fails to pay.
How Personal Guarantee on a Business Loan Works
Personal guarantees are common with small businesses that haven’t accumulated assets that can be used to secure a loan. Starting a small business requires courage since there is no assurance that the company will stand the test of time. Therefore, most banks are hesitant when it comes to offering start-up loans.
That’s why lenders will ask for a personal guarantor to secure the loan. The lender will give you the loan provided you meet that requirement since they want your business to succeed. However, if the business fails, you can’t just forget everything and walk away scot-free. The person guaranteeing the business debt will pay until the last penny.
Your lender will inform you in case you’ll need a personal guarantee when applying. With some loans, such as an SBA loan, you must have a personal guarantee.
In case you don’t have any valuable personal assets, you’ll still have to sign a personal guarantee form, but that will be an unsecured guarantee. But if you have valuable assets such as equity in a home, you can use them as loan security in case the business fails.
If you have a cosigner, the individual must pledge their valuable assets against the business loan. A co-signer is needed when one does not have enough valuable assets to secure the business loan. So, your co-signer must have enough assets to be eligible.
But supposing you don’t have assets and a co-signer to pledge their assets, there are high chances that all your potential lenders won’t give you the loan.
Take Away
A personal guarantee for a small business loan is when a business partner or an executive is accountable for a business loan. They pay the debt should the business fail to pay. Personal guarantees are common for companies without adequate assets to help secure a loan. To get a business loan, you must sign a personal guarantee.
