Taking a loan for your business can help you in an expansion program or aid in the smooth running of the business. However, acquiring a loan has its requirements depending on the lender and the amount you intend to take.
Signing a personal guarantee is an essential requirement that helps you qualify for financing. While it is not mandatory for all lenders, you need to know when and why you should sign it.
What does a personal guarantee entail?
A personal guarantee is a legally binding contracting that pushes the business owner to repay the money owed due to eventualities in the business. While not all lenders will need collateral, some will require you to pledge personal assets. In addition, some will require you to pay the total amount and the interest incurred.
When does the lender require a personal guarantee?
As mentioned above, not all lenders or loans require the signing of a personal guarantee. Therefore, you should be in a position to tell when and why the process is necessary. A personal guarantee is a fair standard that protects lenders from business closure due to losses.
If a personal guarantee was used to secure a loan, the lender can proceed to a court of law and ask for permission to liquidate assets. If these sources of capital are not enough, the lender should consider suing the owner of the business to obtain a full repayment.
A personal guarantee usually required in place of a business that lacks collateral. In this case, the business doesn’t qualify for the amount requested. To meet the requirements of this loan, the lender asks the business owner to sign a personal guarantee.
While this form guarantees a smooth process while recovering money, it also acts as a commitment from the owner. The business owner will act in all capacities to ensure that the loan and the interest are paid on time to avoid losing personal assets. A personal guarantee is used to declare personal liability over the loan.
What factors should I consider before signing a personal guarantee?
A personal guarantee is an obligation to pay the loan and the interest accrued over time. Therefore, it compels the business owner to pay the loan or risk being subjected to legal action and losing assets.
Although it has enormous benefits, the risks are immense. However, you should look for ways to manage the risk by asking for a limited guarantee or negotiating with the lender.
Before signing, you can clarify when and how the personal guarantee will be affected to understand what you are signing. Then you can ask the lender to reduce the guarantee to allow space for the business to grow and stabilize.
A good negotiation should result in excluding some personal assets, especially those held jointly with the spouse. Instead, a higher interest rate can be replaced by a personal guarantee, while personal guarantee insurance will protect your assets. The benefit of signing a personal guarantee might be outdone versus risk in case of uncertainty in the future. Therefore, before signing one, look for other options or make the perso