Trying to get a business loan can be difficult, especially if you don’t know what you are doing and you are aiming for $100k, $200k, or even $300k or more…
Unfortunately, there’s really no assurance that you’ll get approved, and sometimes if you screw things up, you can even be red-flagged.
And we don’t want that.
This can prevent you from tapping into insane business opportunities in the future.
If you have been following me for a while, you must already know that I am a big advocate of business loans, also known as corporate credit.
Why?
Well, simply because these are (in my humble opinion) the easiest and fastest ways to buy all you need to scale your business or investments quickly without working your butt off for years or saving money.
Which usually never works, but that’s a topic for a different conversation.
So, let’s talk about signing a personal guarantee for business loans.
This is a good idea because it is one of the tools in your arsenal that can improve your approval odds and secure the most favorable loan terms.
“But what is a personal guarantee, and Is it different from a business collateral?”
A personal guarantee means that you’ll be personally responsible for repaying the debt if the business fails to.
If you’re having difficulty deciding whether to sign a personal guarantee, this will be the most important article you’ll read today.
With over two decades of experience as a banking expert and financial coach, I’ll not just fully define personal guarantees.
Below, I’ll also reveal whether you can get a business loan without a personal guarantee.
How cool is that?
While signing a personal guarantee has some potential advantages, every business is still unique, and not all will benefit from signing it.
So, let’s get right into it!
What’s A Personal Guarantee?
A personal guarantee is when a borrower promises to repay the loan through their personal assets if the business defaults.
Personal guarantees work like business loan collateral since they also give lenders assurance that the borrower will repay the debt.
When a borrower who signed a personal guarantee defaults on a loan, the lender can take legal action and be personally liable for the remaining loan balance.
Every business owner must understand how personal guarantees work since they can have a massive effect on your personal financial future.
Types of Personal Guarantee
Borrowers must repay the business loan with their own assets when their business cannot make its payments.
Lenders have the right to seek repayment from the guarantor if necessary.
The size and terms of the loan also impact whether lenders require more than one guarantor.
Personal guarantees are like added security that helps protect lenders’ interests if the borrower defaults on the loan.
Here are the types of personal guarantees:
Unlimited personal guarantees
An unlimited personal guarantee is an individual guarantor responsible for repaying all of the loan in full.
For instance, if the business takes out a business loan, the borrower with an unlimited personal guarantee is fully responsible for paying the debt if the business can’t pay it.
This individual may also be held accountable for the lender’s legal fees and outstanding loan interest.
Limited personal guarantees
Having a limited personal guarantee in your loan means that there’s a ceiling on the amount you’re personally responsible for.
This type of guarantee is typically seen when multiple business owners share the personal guarantee responsibility.
For example, if you own 30% of the business, the contract can hold you personally responsible for 30% of the loan.
Do All Business Loans Require a Personal Guarantee?
Most lenders will require borrowers to sign a personal guarantee on their business loans.
However, some lenders are willing to waive this requirement if the business is willing to offer a large deposit or puts up valuable collateral that meets the lender’s standards.
Before committing to a business loan, you must first understand how personal guarantees and even collaterals work to help ensure that you’ll be able to repay the loan.
Here’s how some common business lenders can require personal guarantees:
- Government lenders. Small Business Administration loans or SBA Loans typically require an unlimited personal guarantee for business owners who own 20% or more of the company.
- Online lenders: Online lenders may also require a personal guarantee for business loans.
- Banks (Traditional Lenders): Generally, traditional lenders like banks require some form of personal guarantee for business loans. They may waive this requirement if you have excellent credit or sufficient collateral to offer.
Can You Get a Business Loan Without a Personal Guarantee?
If you can’t commit to a personal guarantee but really need that loan, don’t worry; it’s still possible to get it!
Even though most lenders require a personal guarantee, it may not be a good option for both borrowers and lenders.
Without a personal guarantee, the lender will feel more at risk.
However, some lenders will still be willing to work with you if you don’t sign a personal guarantee. But expect to pay higher interest rates and stricter loan terms.
It is also possible to avoid a personal guarantee by offering a large deposit or a letter of credit.
Advantages of Personal Guarantees
- Increases Chances of Loan Approval—Signing a personal guarantee can help improve your chances of securing the loan, making it a great option for startups lacking credit history.
- Better Loan Terms—Accepting a personal guarantee can encourage lenders to offer better loan terms and lower interest rates.
- Business Growth—Taking out a business loan and using it responsibly can help you scale your business and achieve your business goals.
Disadvantages of personal guarantees
- Impact on your credit score—Signing a guarantee will not affect your credit score, but if the loan defaults or you continuously miss payments, it will cause a massive drop in your credit.
- Personal Assets—When you sign a personal guarantee, your personal finances or assets, such as your house, car, and savings, are at risk since they can be used to repay the debts if you default on the loan.
- Bankruptcy—If the business loan defaults and your personal assets are insufficient to cover the outstanding debts, you may be declared bankrupt and face a financial crisis for years.
Things to Consider Before Signing A Personal Guarantee
If you’re unsure if a personal guarantee is a good option, consider these things before signing one.
- Check And Review The Terms—Review and fully understand the loan terms before agreeing to a personal guarantee. Check if you’re okay with the interest rates, terms, and your liability if your business can’t repay the debt.
- Consult a Professional—Before signing a personal guarantee, it’s also advised to seek legal advice or work with a professional to ensure that everything is properly explained.
- Business’s ability to repay the debt—Consider your business’s cash flow and income to be able to know if the company can meet all payments and fully repay the loan.
- Your Personal Assets—Of course, you should consider whether you can repay the loan with your assets in case of default. Check if you have enough savings and other investments if necessary.
- Business Collateral—If your business owns valuable assets, you can use this as collateral to avoid pleading a personal guarantee. Just ensure that the collateral’s value is sufficient to the loan amount.
Personal Guarantees For Business Loans: Final Thoughts
Personal guarantees can be a great way for business owners to secure financing, specifically for owners who lack business assets that can be used as collateral.
However, signing a personal guarantee can affect your finances since you’ll be responsible for repaying the business loan if the business can’t.
Understanding the terms and implications fully when signing a guarantee is critical since you’re putting your personal finances at risk.
Personal guarantees on a lender’s POV are an added security when entrepreneurs take out a loan.
Another tip is to research and compare different lenders and financial products. There are various to choose from.
Comparing them can help you get a better chance of securing the best and most suitable loan for your business.