Understanding personal guarantees for a business loan
Key takeaways
- A personal guarantee on a business loan can be a part of the agreement for the borrower to repay the debt.
- The purpose of a personal guarantee is usually to give some assurance to a lender and reduce risk.
- A personal guarantee is usually captured with a signature, but the terms of any business loan agreement can vary and may require additional information.
Funding is important for almost any business, big or small. Business bank accounts and business credit cards can have various benefits to help fund or grow a business.
Business loans have different eligibility requirements, and the specific terms are negotiated between the lender and borrower. However, a personal guarantee can be one of those terms, and in this article we’ll explain how this generally works.
What is a personal guarantee?
A personal guarantee is a declaration or promise someone makes on behalf of themselves or an organization to accept responsibility for a debt. The person who makes this promise may be referred to as the co-signer on a loan. A personal guarantee may also be referred to as a loan guarantee, but it’s ultimately a provision of the loan agreement.
The typical purpose of a personal guarantee is to give the lender an assurance (or guarantee) that the debt being lent will be repaid. This could supplement or replace information that would otherwise provide the assurance a lender wants when providing a loan.
Example of a personal guarantee
One example of a personal guarantee is when a parent helps a child apply for a loan or line of credit. This common example involves the parent signing an agreement to the credit card’s terms and conditions, hence the term “co-signing.” The personal guarantee essentially means the parent is promising to pay the debt in the event the child cannot.
How do personal guarantees for business loans work?
For a business loan, a personal guarantee would be a provision in the loan’s agreement. This creates a personal responsibility for the company’s debt and repayment of the loan in the event of a default.
When applying for a business loan, a variety of information about a business may be required. A business plan, expense report and other financial information are some examples. These requirements are similar among most loans and lines of credit. Lenders need to evaluate a variety of information about the applicants and their finances when deciding whether to offer a business loan.
A lender may ask for a personal guarantee when offering a loan because of concerns about the business. The concerns could be about various financial factors related to the current and future state of the business. A personal guarantee then becomes of a way of reducing risk to the lender.
What’s required for a personal guarantee?
The exact terms of a personal guarantee and loan agreement can certainly vary by lender and from loan to loan. Examples may include a signature and specific documentation.
Should I sign a personal guarantee?
A personal guarantee creates an obligation and liability for loan terms. Deciding to sign a personal guarantee will depend on finances, goals, plans and business structure. The terms of a loan are also important to consider.
The consequences of defaulting on a loan that included a personal guarantee can also vary from situation to situation. It may be a good idea to consult a lawyer or financial advisor when deciding if you should sign a guarantee on a business loan.
