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If you’ve spent some time searching for a business loan, chances are you’ve come across more than one that asks for a personal guarantee from the owner or owners. It’s a common feature of small business financing, especially if your business just barely makes a lender’s requirements for revenue and years trading.
We break down what it means, how it can help and when you might want to consider other options that don’t put your family’s finances on the line.
When you sign a personal guarantee on a business loan, it means that you’re on the hook for paying off all or part of your business’s debts if your business can’t. Personal guarantees are usually unsecured, meaning that they aren’t tied to a specific personal asset like your home or your car – you’re just responsible for paying up by whatever means. Many small business lenders require a personal guarantee because small businesses can be risky to lend to.
A personal guarantee often increases your business’s chances of being accepted for a loan and can give you access to better rates, but also comes at a huge personal risk – if your business is unable to repay the loan, you might compromise your savings or even end up with a personal bankruptcy that will stay on your credit report and thus impact your chances of getting credit for six years.
So, you need to consider your options carefully before signing up for it. Most importantly, you need to know what you’re signing – if you’re not sure what the contract you’ve been sent entails, it may be a good time to seek out legal advice.
You may be asked to act as a guarantor or as an indemnifier, and it’s important to understand which the case is because if things were to go wrong you’d be liable in different ways:
In both cases, checking the contract carefully is obviously pivotal to understanding what the consequences of taking out a guarantee may be.
We’ve partnered with Funding Options to help UK businesses compare lenders and navigate the different borrowing options available.
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Given that personal guarantees are such a common practice, if you can’t avoid giving one, it may be worth knowing how you can minimise its impact on your personal finances:
Since a personal guarantee doesn’t require any fixed assets – like your apartment or family heirlooms – you don’t necessarily need to have any to personally guarantee a loan. However, you typically need to have some sort of funds to show you’ll be able to pay off the loan. You’ll also need to meet certain credit score criteria to get approved for a personal guarantee. In some cases, you might be required to submit a list of all your assets and liabilities during the application process – even if it isn’t much.
There’s no way around it: personal guarantees are a huge risk that can affect you and your family. Here are some other options you might want to consider instead of taking on that responsibility.
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