What is a Personal Guarantee?
A business owner must understand what personal guarantees are before signing when completing an unsecured business loan. The majority of unsecured business loans require a personal guarantee to be signed by the business owner or by a director. The personal guarantee document is a legal promise between the business owner and the lender, therefore the business owner is making a promise to the lender that they will pay back the loan should the business be unable to make the required repayments.
In simple terms, if the business is unable to make or keep up with the loan repayments, the individual who signed the personal guarantee becomes responsible for paying back the loan to the lender in the case of default.
The main purpose of the personal guarantee is to minimise the risk for the lender, in the majority of circumstances lenders always require personal guarantees. In addition they are widely used amongst business finance products. Therefore it is important that you fully understand personal guarantees when applying for a loan, comparing the pro’s and con’s or considering plan A and plan B will be useful tools. For instance, personal guarantees can enable access to finance which allows the business to grow or launch a new product, on the other hand if the businesses growth plans don’t go to plan then there is a personal commitment from the business owner. Nevertheless, it can be possible to find a lender to provide an unsecured business loan without a personal guarantee if the businesses financials and credit information stand up.