What Is a Personal Guarantee for a Business Loan?

When applying for a business loan, you may have to make a personal guarantee. They aren’t required for personal loans. Business loans, though, often require a personal guarantee. Whether you’re trying to obtain a business loan from a bank or alternative lender, you may be required to make a personal guarantee.

Personal Guarantees Explained

A personal guarantee is a binding pledge or commitment that guarantees a business loan with the borrower’s personal finances. Business loans, of course, are intended for businesses. If you own a business, you can obtain a business loan to finance it. You can then use these borrowed funds to expand into new territories, invest in marketing, develop new products or otherwise grow your business. But the lender may require you to make a personal guarantee.

By making a personal guarantee, you are placing your personal finances on the line. As long as you pay back the business loan according to the lender’s terms, nothing will happen to your personal finances. If you default on the business loan, however, the lender may claim ownership of your personal assets.

Is a Personal Guarantee Necessary?

Many lenders require a personal guarantee for their business loans. Lenders must evaluate a borrower’s risk of default. If a borrower has bad credit, the lender may require him or her to make a personal guarantee. It’s the equivalent of collateral. A personal guarantee will provide the lender with recourse if the borrower defaults on the business loan. The lender can claim ownership of the borrower’s personal assets to make up for the lost money.

Of course, there are instances in which you may not be required to make a personal guarantee. If your business has good credit, for instance, lenders may not require a personal guarantee. Good business credit is a sign of trustworthiness. It indicates that lenders can trust your business to repay its debts, including its loans.

Even if it’s not required, a personal guarantee offers advantages. It can help you achieve a lower interest rate. Lenders may offer lower interest rates on business loans if you make a personal guarantee. A personal guarantee can also speed up the approval process. Lenders may approve your application more quickly, resulting in fast cash for your business.

In Conclusion

A personal guarantee is a commitment to repay a business loan using your personal finances. Many lenders require it, especially for businesses with bad credit.

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