A personal guarantee is your commitment to repay your business loan if your company fails to meet its obligations. If you default on the loan, your personal property, home and other possessions can be seized and sold to pay back the money. Offering to sign a personal guarantee may provide you with better odds for approval or a lower interest rate, but it also has its drawbacks. Do your research and make sure you are familiar with the terms. If you have questions, get the answers you need before you sign the agreement.
How Do Personal Guarantees Work?
A personal guarantee is a legally binding contract stating that you agree to be responsible for the repayment of your business loan if your company isn’t able to. If your business is having trouble getting the financing it needs, a lender may agree to help if you agree to sign a personal guarantee to cover the loan in case your company defaults. While this may make it easier to get a loan, it can spell disaster for your personal finances if something goes wrong.
When Is a Personal Guarantee Required?
Every lender has their own requirements in terms of requiring a personal guarantee for a business loan. Government lenders, online lenders and traditional banks all require some degree of personal responsibility. Before applying for a business loan, do your research and look for a lender that will work with you when it comes to determining how much you will be personally responsible for when it comes to your business loan.
Do All Business Loans Require a Personal Guarantee?
Many lenders require a business owner to be partially responsible for a percentage of their business loan. If your business has a strong credit rating and is able to provide a letter of credit, a lender may waive the requirement for a personal agreement. Being able to offer a large deposit or provide a sufficient amount of collateral will also work in your favor if you want to avoid signing a personal agreement.
Can You Get a Business Loan Without a Personal Guarantee?
Getting a business loan without a personal guarantee isn’t easy, but if you have the financial means to provide what your lender requires, it can be accomplished. If you do get the loan without signing a personal guarantee, you may notice that your interest rate is much higher, or other restrictions may have been placed on the loan’s term.
Things to Consider Before Signing a Personal Guarantee
Before you agree to sign a personal guarantee for a business loan, make sure you know the terms and requirements of the loan. It’s also important to know what you can afford personally. You will need to find out if you qualify for a business loan and what will be needed to be approved. Always do your research before you sign on the dotted line.
Personal agreements shouldn’t be signed without a lot of forethought. Contact us to get in touch with our staff at EDC to have all your questions answered. Ask as many questions as you need to feel comfortable moving forward. We can assist you with the best.