What is a Personal Guarantee?
Posted on 16th March 2022 at 12:17
A Personal guarantee is a legal promise made by individuals to repay credit issued to a business, of which they are either executives or partners. When a personal guarantee is given, the principals of the company pledge their assets and agree to repay debt from personal capital in case the company defaults. Providing a personal guarantee ensures repayment of the loan by the guarantor if the business is unable to repay the loan, as they are personally and legally liable to pay the outstanding debt. If the lender obtains a judgement against you, they can probably pursue your assets to satisfy the judgement. However, if you have confidence in your business, the loan could be worth the risk. It is always a risk to lend to a Small business, which in many cases is the reason for them finding it hard to get an unsecured business loans. It is definitely worth considering though, as it can bring opportunities that may have previously been out of reach. Nevertheless, by approving to a personal guarantee, you could be helping your odds, because it is a reassurance for the moneylender. It is commonly used to obtain funds for small and medium-sized businesses where the difficulty is faced in raising funds through commercial institutions due to lack of credit history. This method, however, can help to unlock funds that may otherwise be unattainable.
Personal guarantees are termed as unsecured debt as they are not backed by collateral. The personal guarantee remains in force until the entire loan is repaid to the lender. A personal guarantee can be terminated only after delivering a written notice, 30 days before the termination of the guarantee to the lender. Despite such notice, the personal guarantee will remain in force for the amount of loan already advanced. The personal guarantee offers an additional level of safety to credit issuers who wish to ensure they will be repaid. It helps businesses to get credit when they aren't as established or have an inadequate credit history to qualify on their own. It also mitigates the risk to creditors since they have a legal claim to an individual's assets. It serves as a great incentive for the growth and development of small and medium-sized businesses.
Personal guarantees: disadvantages
Understanding the possible consequences should also be done while decision making:
Even if you are confident that you will be able to repay, things may not work out that way. In business, there are always uncertainties and anything can happen.
It is a personal burden
If your company becomes insolvent, it will be your obligation to make the repayments from your side. Moreover, if you cannot do this; it can outcome in long-term financial problems.
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