Personal guarantees are one of the most important and least talked about terms in the business world today. A personal guarantee is a promise of repayment of funds or securities to a borrower based on performance of the business. It is often written as a promissory note or debt instrument. A personal guarantee on a business loan means the business will repay the loan if performance is poor. There are many benefits to issuing personal guarantees.
A personal guarantee can be used by a business owner to satisfy credit risk. This is especially helpful for those who have limited capital. The business owner does not need to submit financial information to a lender if they are unable to complete a business deal. The business is not held to the standard lending guidelines that would be required for a traditional loan. This is an effective way of obtaining credit without the lengthy process of obtaining conventional financing.
A personal guarantee can also provide a business owner with a source of investment capital. If a business is expanding or looking for new equipment to improve production, there may not be enough liquid capital available to fund the purchase. A personal guarantee can be used as an alternative investment strategy that allows the business owner to acquire additional personal assets.
Personal guarantees can also be an excellent method for banks to lend money to businesses. Banks are not comfortable lending money to all businesses. There may be too much risk for the business. In order for a bank to make a lending decision, there must be documented evidence that the business is not likely to default on the loan. A personal guarantee offers the business owner a safe haven from bad credit, while building credit in a timely manner.
A business owner who secures a personal guarantee can use it to purchase other tangible assets that will increase their equity. Many borrowers prefer business lines of credit because they are easier to obtain and have better interest rates than many traditional loans. Because the interest rates are typically less expensive, this can translate into significant savings for the business owner. Because business lines of credit carry variable interest rates, a personal guarantee can be used to lock in a reasonable rate.
Because a personal guarantee can be used for business credit, it can also help a business to secure additional funding for expansion or new projects. Most lenders are cautious about making loans to businesses that are only a few months old. By securing a personal guarantee, business owners can bypass a series of complex due diligence steps required for obtaining traditional business loans. Because the personal assets will be available to the business owner should the need arise, this is an excellent way to circumvent any possible risks associated with securing a business loan.
Another advantage of a personal guarantee is . . . . . . that the business owner can maintain the confidentiality of the agreement. Business mortgages and lines of credit are not publicized, and borrower information is not clearly delineated. Because a personal guarantee is between two individuals, there is no need to reveal proprietary information about the business operation. This means that personal guarantees can provide peace of mind for both parties. With a personal business guarantee, the business owner can protect his or her personal assets from a business competitor should the need arise.
With business credit, business owners can also save time by avoiding application delays. Typically, business credit applications are required to undergo three to four weeks before they are approved. With a personal guarantee, a business owner can skip the lengthy application process. Because business lines of credit typically come with high interest rates, business owners often have to pay much higher interest rates in order to obtain the business credit they need. Personal guarantees allow business owners to obtain business credit with reasonable interest rates. For small business owners who do not yet have a good credit history, personal guarantees can help smooth the path toward business ownership.