Lenders allow small businesses to borrow large sums of money in order to promote their businesses. Small business owners require additional means of assurance for lenders to approve their business loans.
Typically, a lender is likely to establish a line of business credit once they receive personal guarantees from business owners or executives. Signatures from these leaders in a business shift the business liability to the signatory.
Keep reading to learn more about how you can secure your business finances by offering a personal guarantee.
What Is a Personal Guarantee?
A personal guarantee is an individual’s legal obligation to repay credit issued to a business. This individual will hold an upper management position in a business.
These guarantees help businesses acquire credit if they do not have an adequate credit history to qualify for the loan on their own. By signing your name to a loan application you will be able to strengthen your application.
Before you sign a personal guarantee, you will need to weigh the risks you are comfortable attaching your name to a business line of credit or loan.
Benefits of Personal Guarantees
Signing your name onto a personal guarantee can increase your business’s financial security. Here are some of the benefits of using personal guarantees.
Sign a Personal Guarantee to Improve Your Qualifications
If you sign a personal guarantee as a top business executive, you could increase your chances of qualifying for your loan. In some cases, for small business operations, personally tying yourself to the loan may be the only way to qualify for a loan.
Better Terms for Business Loans
Borrowers are able to establish a greater sense of trust and receive more favorable terms by signing onto a personal guarantee. These terms may include a better interest rate or terms for the borrower.
Business Liability and Business Credit
When you sign your name onto a business loan, you accept liability for the debt. When you sign your name onto a loan through a personal guarantee, you are making yourself liable to fulfill the terms of the loan.
In many instances, when a business needs to gain a line of credit, a lender may require a personal guarantee. To a lender, a business may seem like a volatile investment opportunity.
Your best option to avoid signing a personal guarantee is to work towards building strong business credit. With strong business credit paired with a large down payment, your lender may allow you to skip the personal guarantee.
Personal Guarantees Can Help Small Business Owners
Small business owners need to actively work towards establishing financial security. Personal guarantees serve as a means of strengthening your opportunity to secure business credit and business loans.
Although your signature may shift your financial circumstances from business liability to personal liability, it can bring you great financial security. Connect with us to learn more about securing your business finances through business loans.