Many small business owners find that banks and creditors ask them for a personal guarantee. Becoming a personal guarantor for your company’s business loan can bolster the odds of approval, but what does it mean for you?
In this article, we’ll cover exactly what personal guarantees are and what effects they might have on your business. We’ll go over the details of personally guaranteed loans, what benefits they offer and what risks they might pose.
Let’s address your first question: What is a personal guarantee?
A personal guarantee as an individual’s promise to repay credit borrowed by a business for which they are a part, either as an executive or a partner. Therefore, if the business cannot make payments on the debt, the individual who signed the personal guarantee is liable.
Understandably, personal loan guarantees improve your chances of getting approved for a loan . When you assume liability for the debt, rather than your business alone, the lender has an extra degree of assurance regarding your intention and ability to pay back the loan.
In other words, signing a personal guarantee makes you more trustworthy in the eyes of a lender. If your business cannot repay the debts incurred by the loan, your guarantee provides a safety net for the lender to fall back on.
In some cases, in addition to requesting a personal guarantee for personal asset recovery, lenders may also file a UCC lien entitling them to business assets in the event of default.
Generally, under a limited liability arrangement , corporate debts and liabilities are not shared or assumed by the individual members of the company. However, in the case of personal guarantees, any personal guarantor of a business loan assumes personal responsibility for the debt incurred by the limited liability company of which the guarantor is an owner.
There are several kinds of personal guarantee loan types. An unlimited guarantee stipulates that the lender can recover the entirety of the loan amount in the event of default or business failure. Usually, this sum also includes legal fees, interest and other associated charges.
If you sign a personal guarantee and there is a business loan default, assets belonging to you or your business might be used to repay the loan to which you signed as a personal guarantor.
Lenders could pursue any of the following assets belonging to the personal guarantor:
Imagine a scenario where your business borrows $100,000 from a loan for which you signed a personal guarantee. Your business pays down $20,000 but fails to make any installments after. The creditor spends $10,000 on lawyer fees to gain judgment in its favor. Therefore, you would personally be liable to repay $90,000 – the remaining $80,000 plus the $10,000 in legal costs.
Unlike an unlimited guarantee, a limited guarantee loan limits the amount of money collected from a personal guarantor. You share the burden of loan repayment with other partners in the company who have signed the guarantee.
Take loans backed by the U.S. Small Business Administration (SBA), for instance. Depending on the loan type and amount, the SBA will require individuals with a 20% or car title loan with no credit check more stake in the company applying for financing to take part in the personal guarantee loan agreement. However, SBA Paycheck Protection Program loans and Economic Injury Disaster Loans up to $200,000 do not require any personal guarantee.
The varieties of limited personal guarantee loans are described at length below. These loan types have unique benefits and drawbacks that vary according to the terms agreed upon.
A several guarantee holds that each signatory on the agreement is held to a fixed share of the total liabilities incurred by the business, decided on before the loan is approved. This makes each personal guarantor aware of what amount he or she could be responsible for repaying.
A simple example, if 2 business partners agree to share an even split of the liability, then each would owe 50% of the loan if the business defaults or misses a payment.
Under a joint and several personal guarantee loan agreement, each person on the guarantee can be liable for the total incurred debt. Although the lender can recover only up to the limited amount, they can collect debt repayments from any co-signers on the agreement.
Under this scenario, it’s plausible that you might be on the hook for the liabilities agreed upon by your business partner if they aren’t able to cover their portion of the debt owed.
Before agreeing on a joint guarantee loan, ensure that you understand what you’re signing and trust the word of everyone involved.