Business Loan with a Personal Guarantee: Top 7 Tips

A personal guarantee is a signed agreement with a lender that you are willing to use your personal assets to repay a loan. It is not quite the same as collateral as you are not listing specific items but you are agreeing to be personally responsible for the loan if your business fails to make the payments to the lender.

On average, about 80% of business loans require a personal guarantee. So if you are a small business owner and are searching for guaranteed online personal loans then there are a few tips and bits of information that you should understand before committing to a loan.

signing loan contract

Know What You Are Agreeing To

Understand that you are taking personal responsibility for the loan payments if your business fails to make the payments, can’t make the payments or even if it goes bankrupt. Also, consider that if your business has failed then you will more than likely not have a job or an income. So if you fail to make the payments then your personal promise to pay gives the lender the right to liquidate your personal assets which could include your home, vehicles or bank account to repay the loan.

Who Must Sign

Lenders will have different policies but as a general rule, you can count on anyone who owns 20% or more of the business needing to sign a promise. In addition, anyone else who cosigns on the loan will need to sign. And finally, the spouse of the primary business owner will need to sign. This process is all to ensure that the lender is going to get repaid. Small businesses can be a risky investment and lenders want to be certain that they have a person or persons to turn to if the business fails. The spouse of the primary business owner must also sign because in most cases the assets that the business owner owns personally are co-owned by his or her spouse. This is a way of being sure that the assets are really committed to be used as a form of repayment and that assets cannot be moved to a spouses name to avoid being liquidated to pay the debt.

What You Are Risking

Your personal guarantee covers pretty much everything that you own. The lender is authorized to liquidate any and all personal assets for the most part but there are a few exceptions. In most states there is a homestead protection act in place that prevents the lender from taking your primary residence even if you sign a personal guarantee. But a few states only offer a certain amount of protection and if your home exceeds the cap then you would be forced to liquidate the home or get a loan for the amount in excess of the protected amount. Also, general lenders cannot seize your IRA, 401k or other retirement accounts. Only a government entity such as a federal credit union can take a retirement account as payment for a guarantee.

You Can Negotiate

A personal guarantee is not a carved in stone document. Just as with any other type of loan agreement, you have the right to negotiate the terms with the lender if they are willing to work within your terms. There are many lenders out there who want to loan money to consumers and to small business owners so you need to use that to your advantage. If you want to negotiate terms then you need to work with at least two lenders to request a loan. Then you will have the option to select one or the other depending on who is more flexible and willing to negotiate to terms that you find more favorable.

Terms to Negotiate

You do not necessarily have to personally guarantee the entire amount of the loan. You can negotiate to guarantee a smaller percentage if for example the business is offering collateral on part of the loan amount. You can also request that your personal guarantee only equal a percentage of the loan that is equal to your ownership in the business. If you only own 30% of the company then you would promise to repay only 30% of the loan. You can also request your guarantee does not include certain assets. If your state does not provide a homestead clause then you could request that your home not be included in the asset list. You might also specify assets that you co-own with another party.

Set A Time Limit

You might also want to find a lender who is willing to include a sunset clause in your guarantee. This is an agreement that you will only provide the personal guarantee for a specified length of time. In most cases it is for the first half of the loan term when the balance is the largest. After half of the term of the loan then you are no longer personally responsible for the remaining balance. This is a nice feature to have but also understand that you are only responsible for the remaining balance on the loan and that will have greatly decreased as you get further into the term.

Know a Guarantee VS. Collateral

You also need to understand that when you sign a personal guarantee it is different than offering certain assets as collateral on a loan. If you were using a vacation home as collateral then you would need to maintain ownership during the entire course of the loan, but that is not the case with the signed guarantee. You are free to buy and sell assets throughout the loan term but remember that whatever you own at the time of the default of the loan is what the lender can seize. Understanding the potential risk involved in signing guaranteed online personal loans is very important. You need to understand what you are placing at risk. No one enters a loan believing that they will default but it can happen, and you want to know what you have personally promised and risked if your business should default or go bankrupt.

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