Personal guarantees are provisions on a loan agreement that helps lenders reduce risk and typically improves odds of approval. Know what’s right for your business when securing the right financing solution for your business.
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Key takeaways:
A personal guarantee helps a lender reduce risk when approving a loan. It is a provision on a business loan agreement that declares the guarantor is personally responsible for the company’s debt in case of default. Rather than pledging physical assets, a personal guarantee essentially means the guarantor personally guarantees the loan will be repaid in full, plus any interest accrued. The guarantor can be the business itself or, if a business can’t afford to repay the loan or doesn’t want to risk bankruptcy, the business owner can list themselves as the guarantor to ensure the loan will be repaid.
Limited personal guarantees and unlimited personal guarantees are the two main types most commonly seen on a loan agreement. The main difference between the two focuses on the extent of your personal liability and how long the guarantee applies.
In an unlimited personal guarantee, guarantors are required to repay the loan in full. On the other hand, a limited personal guarantee can reduce the time, dollar amount or percentage of the loan for which you’re liable.
A UCC filing is commonly used in junction with a personal guarantee, but is a different type of stipulation on a loan agreement. A UCC filing indicates a lender has an interest in the personal or business property of a debtor and serves as collateral until the loan is repaid by the borrower. The “Uniform Commercial Code” is a set of similar laws across the United States to govern sales and other commercial transactions. Therefore, a UCC filing is a common provision on a loan agreement often seen nationally. It protects the interests of the lender by decreasing the risks associated with granting a loan and allows a borrower to receive funding without risking the loss of specific assets unassociated with the loan agreement – such as personal property.
There is always risk involved with a loan, which is why practices such as collateral, personal guarantees, or UCC filings are common stipulations to reduce the risk of granting a loan. Using a personal guarantee or UCC filing reduces risk for the borrower and allows a borrower to receive funding without the option of losing personal or business assets, yet still provides protection for the lender to ensure the loan will be repaid and not defaulted on. By knowing what is realistic for your business and what you can afford, opting for a personal guarantee or UCC filing is a great way to secure capital for your business without running the risk of losing personal property or business assets.
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Only if you default on your loan and are unable to pay it will a personal guarantee affect your credit score.
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