So you’ve been asked to sign a personal guarantee, or maybe you’ve already signed one. But what, exactly, is really a personal guarantee, and just how will it affect you?
Chances are, if you’ve accepted business financing from the bank, bank, online lender, or any other source, you’ve been asked to sign an individual guarantee. This agreement (sometimes also spelled “personal guaranty”) is a promise that you simply, the company owner, are responsible for repaying a company loan should your business become unable to.
Unfortunately, you’ll have in all probability to sign an individual guarantee to get business financing. That said, not every personal guarantees are equal.
Whether you are asked to sign a personal guarantee or you’ve already signed one, reading this article will help you evaluate which an individual guarantee method for your company. Continue reading to know what to look for, what to avoid, and what you've got a say directly into save yourself and your business potential hardship down the road.
What Is really a Personal Guarantee?
A personal guarantee is definitely an agreement whereby if a business cannot finish repaying financing, the guarantor(s) (the person or persons filling out the guarantee) accounts for repaying the loan with their personal belongings.
Traditionally, an individual guarantee is signed by anyone who owns at least 20% of the business. The agreement is also commonly signed by a loan cosigner and the spouses of all guarantors.
This type of agreement is commonly required whenever you borrow capital from the bank, bank, or online lender and also pertains to many business charge cards.
It’s worth noting that a loan having a personal guarantee is not considered a secured loan because the agreement is not tied to any sort of assets — i.e., collateral. Many lenders who advertise “unsecured loans” probably still require this agreement.
Although signing over possible rights to your assets is daunting, there are a few good reasons to sign an individual guarantee. Firstly, an individual guarantee will help you get yourself a loan even though you don’t have business collateral. Secondly, signing a personal guarantee may qualify you for a lower interest rate from your lender.
However, personal guarantees still give a lot of power to lenders. The good news is there are various kinds of agreements, plus some of these offer more protection for you and your partners than the others. Comprehend the differences, and you’ll have a better chance of avoiding a bad agreement.
Why Lenders Require Personal Guarantees To Get Business Loans
A personal guarantee makes it more likely that the lender can get their cash back. When you sign an individual guarantee, it proves to the lender that you are fully committed to repaying the money you are borrowing. The guarantee also ensures that the lending company may have legal recourse to pursue their money if you don’t repay.
Lenders that require personal guarantees can also offer better rates and fees than they could having a fully unsecured business loan. That’s since they're well informed that they’ll obtain investment back and allows them to advertise competitive rates that attract prospective borrowers.
Types Of Personal Guarantees
Typically, personal guarantees are divided into two categories: unlimited and limited agreements. Listed here are the fundamentals of every one:
Unlimited Personal Guarantee
If you're a guarantor with an unlimited agreement, you are giving the lender permission to gather anything you'll still own them plus any legal fees that may have incurred while the lender was securing a judgment against you.
For example, should you still owe $40,000 on your loan and it costs the lending company $8,000 in legal fees to get a judgment against you, you'll owe $48,000.
An unlimited guarantee is often extended to single-owner businesses. Although this kind of guarantee doesn't provide a large amount of protection, there is a possibility you can negotiate with your lender to put limitations around the agreement.
Limited Personal Guarantee
Limited guarantees are utilized when multiple business partners are signing for a loan. There are two various kinds of limited guarantees: several guarantees and joint and several guarantees.
If you and your spouse(s) sign a joint and several guarantee, each guarantor is responsible for the full quantity of the borrowed funds. As you can imagine, this type of agreement could lead to problems between you and the other guarantors if something should go wrong.
On another hand, a several guarantee means that you as well as your partner(s) are responsible for a set percentage of the outstanding capital and attorney's fees. Normally, the percentages match what amount of the business each partner owns.
A several guarantee is more desirable inside a scenario with multiple business partners because each partner knows (and agrees to) how much they’ll result in in advance.
Personal Guarantee VS Business Collateral
A personal guarantee is different from business collateral in some important ways. Although the net effect of a personal guarantee is basically the same as collateral — you're incentivized to repay your loan so that you don’t lose your assets — business collateral along with a personal guarantee differ in a single notable way: Business collateral is restricted to your business assets, while a personal guarantee is associated with your personal assets.
A loan secured by business collateral can include specific collateral, such as business property, or it might be secured having a blanket lien, including all of your business assets. If you default in your secured loan, the lender can seize whichever business assets you pledged — or in the situation of a blanket lien, these — however they cannot touch your individual assets. That is if you don't also have signed a personal guarantee. You should know that most loans that require a blanket lien will even need a personal guarantee.
Another distinction between business collateral and a personal guarantee is the fact that a loan secured by business collateral triggers a UCC filing notifying creditors that there is a lien in your business. This filing can have on your credit report making it difficult that you should obtain a second loan before you repay your secured loan and get the lien removed. A personal guarantee, however, will not trigger a UCC or show up on your credit report so long as you don’t default on the loan.
How Personal Guarantees Can impact Your Business
So what goes on if you sign a personal guarantee? So long as you repay the money you borrow after your term, nothing! Still, you need to think about what's going to happen if you can no longer repay your loan. Nobody ever wants or intends to default on the business loan. Sometimes, however, it’s unavoidable.
Here are the two scenarios that can happen if you default on your loan with a personal guarantee:
The Lender Enforces The Guarantee
How much money you still owe and just how many valuable personal assets you own are essential factors that lenders consider when deciding if you should attempt to enforce the agreement.
Should the lending company gain a judgment against you, they might be in a position to seize business assets (for example cash reserves, accounts receivable, or equipment), personal belongings (such as jewelry and cars), or garnish your wages.
In most states, even when a lender gets a judgment against you, they can't pursue your home or retirement accounts.
The Lender Doesn’t Enforce The Guarantee
Personal guarantees are difficult to enforce, especially when compared with specific assets that have been put up for collateral. Often, the only method your lender can regain any lost capital would be to get you to the court and obtain a judgment against you. The lending company may not deem the reason worthwhile should you don’t have very much money outstanding or if they are unlikely to get their capital back.
Be aware that, whether or not the lender decides against suing you, defaulting on the loan may have an effect on your individual and business credit ratings, as well as your past-due debt may be sent to collections. If you have also signed a blanket lien, the lending company can enforce the lien and seize your company assets.
Should You Sign A Personal Guarantee?
Chances are, if you want a business loan, the answer is yes. Not many business lenders offer financing without a personal guarantee. Those that don’t require the agreement often charge high-interest rates or fees.
That doesn’t mean you need to sign any personal be certain that you come accross, though. Carefully read over the the agreement and, if possible, ask for the expertise of a lawyer. When the terms of the contract are not acceptable, there is a possibility that you (or a professional for you) can negotiate the terms of the agreement. You might be in a position to suggest relation to relief for when you’ve paid off some the loan, leave your partner or co-signer from the agreement, or make other arrangements that may offer you more protection.
Otherwise, if you think uncomfortable with the agreement’s provisions, you may have to walk away. There are plenty of other lenders that want your company.
If you choose that an individual guarantee is simply too risky for your business, you've other options for obtaining financing. For example, you can get a business charge card with no personal guarantee. There are also some unsecured small business loans without any personal guarantee (or blanket lien). Check out our reviews for Fundbox, Lending Club Personal Loans, and American Express Loans, all of which offer small company financing options without any personal guarantee.
