When borrowing funds, particularly for a business, it is essential to understand the various factors that come into play. One crucial consideration when seeking a loan is the type of loan and the requirements that the lender has to ensure its repayment. In most cases, lenders require a personal guarantee, particularly for unsecured loans, to minimize their risk and ensure they can recoup their investment.
What does a personal guarantee do?
A personal guarantee is essentially a legal agreement between the borrower and the lender. It serves as a promise that if the borrower is unable to repay the loan, the guarantor, will be liable to repay the outstanding balance. The lender views this as a last resort to recover their investment, as they can seize the director’s personal assets, to cover the outstanding balance.
While a personal guarantee may seem like a significant risk for the director, it can also serve as a significant benefit. Firstly, by offering a Personal Guarantee, the director is showing their confidence in the business and its ability to repay the loan. This can help to build trust with the lender and potentially lead to more favorable loan terms, such as lower interest rates or longer repayment periods.
Additionally, personal guarantees can help directors to secure more significant amounts of capital for their businesses. Lenders often base their lending decisions on the financials of the business and the personal credit of the directors, as well as their overall net worth, which is usually that of a property. A strong personal guarantee can give lenders the confidence to provide more significant amounts of capital, allowing the business to grow and expand.
Lenders can require personal guarantees for other types of loans, such as Invoice Finance, Asset Finance, and Merchant Cash Advances, and not just limit them to unsecured business loans. Depending on the lender, personal guarantees can be partial, capped, or proportionate to the amount outstanding of the loan. For example, a lender may require a 50% personal guarantee of the amount owed outstanding.
While personal guarantees are not legally binding in the same way as a legal charge, they still carry a significant level of responsibility. Directors should ensure they fully understand the terms and conditions of the personal guarantee before agreeing to it. Ensuring that the business has a solid plan in place to repay the loan is also essential to minimize the risk of ever having to invoke the Personal Guarantee.
Conclusion
All in all, personal guarantees are an essential consideration when borrowing funds for a business. While they do carry a degree of risk, they can also provide significant benefits, such as increased access to capital and more favorable loan terms. It is crucial to fully understand the terms and conditions of a personal guarantee and ensure the business has a solid plan in place to repay the loan.
Looking for business financing solutions? Get in touch with a member of the team at Funding Bay. We will give your business consultation and put you in touch with a suitable lender.
