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.
Personal Guarantees 101
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.
Personal Guarantees and Limited Liability
Generally, under a limited liability arrangement , corporate debts and liabilities are not shared or assumed by the individual members of the company. Continue reading