If you are looking to fund your business, you may consider business loans to make it progress. Sometimes, your personal finances may find their way into the picture. If you don’t have a business track record or assets, the lender may need a personal guarantee before approving your loan.
Making the guarantee involves promising to pay your business debts with your personal assets. This can be in the form of real estate or even cash. Personal guarantees form part of the loan agreement. As you apply for the loan, the lender will need to sign an agreement that outlines how they can collect their payment if your business is not able to pay off your loan.
A personal guarantee can either be unsecured or secured depending on the lender you are dealing with. They may ask you to pledge some specific assets like your home or funds from a financial institution. Though personal guarantee is a necessity to get approval for personal loans, it can put you at risk of losing something valuable if you don’t pay it off. Ensure that you pay off the loan to protect your assets and personal credit.
Lenders need a personal guarantee from borrowers for them to evaluate your likelihood of paying the debt. If your business is new, you don’t have business credit history thus the information you provide to the lender is limited. This makes it hard for the lender to decide whether or not they should approve the loan. A lender feels at ease with a borrower who had borrowed before and made consistent repayments than a business person borrowing for the first time.
Limited historical information to help them decide is what makes lenders ask for some form of security which comes as a personal guarantee. Banks also know that some businesses fail after some time and don’t like taking the risk. A personal guarantee increases the chances of the bank getting back their payment.
Providing personal guarantee is risky for you as the borrower because you give leeway for the lender to pursue you if you fail to repay the loan. It can give the bank permission to possess important assets such as your property or even certain valuables.
In a case where your assets are not sufficient to cover the loan, the lender can also take legal implications against you. This can put you into a credit crisis and make it hard for you to get a loan in the future. The lack of paying the loan can also prevent you from buying insurance or even securing a job.
You can manage the risks involved in signing for a personal guarantee by negotiating with the lender. Feel free to request for changes in the agreement if you feel that some terms are too strict for you. Try to negotiate such that you don’t tie down any family assets. Convince them that your business is successful and you would not have any problems in making repayments. Look for ways to reduce the risks of borrowing loans from lenders as you build business credit.