When you’re a start up business or a small business looking for capital, you’ll often come across the need to take out a business loan or investigate ways to make your start up cash flow positive. However, as frequently is the case, taking out a loan can be difficult if you don’t have a financial history or background that shows you can pay back the loan.
Therefore, lenders will often agree to the loan if you are willing to enter a personal guarantee.
What is a personal guarantee?
A personal guarantee is a legal agreement between a business owner and the lender that they will repay the loan out of their individual funds if the business fails to pay back a loan.
This type of loan is called an ‘unsecured loan’ rather than a ‘secured loan’ that would use some sort of collateral such as business premises or assets to pay back the loan instead.
Do I have to take out a personal guarantee?
A business director doesn’t have to provide a personal guarantee against a business loan, however for smaller businesses it may be required from the lender. It does vary from lender to lender, but it’s more often than not that a small business or start-up will be asked to enter a personal guarantee.
If you want to secure the loan, then it is likely you will need to do so.
What does it mean for me?
Unfortunately, not all businesses succeed so it will mean putting your own personal assets at risk against the loan. This could be a mortgage, car, savings and any other liquid assets you may own. In addition to this, you will be required to provide your own financial statements and background as well as those from the businesses.
How does it help my business?
In a nutshell, the more assets you have, the less risk you pose to the lender and less likely to be refused a small business loan. Therefore, you are likely to be able to get more credit and on much better terms.
By providing your lender with a personal guarantee it shows your commitment to the success of the business, which gives them more confidence. This means it helps you to get the capital you need to invest in your business and really make it work.
It is particularly useful for small business owners and directors who are really invested in the success of their business. Often small companies or start-ups don’t have the trade history to ignite confidence in a lender so by providing a personal guarantee, you’re more likely to get the funding.
What are the risks?
Not all businesses make it, and so, by providing a personal guarantee you are putting your own livelihood at risk too. If you have a family, this could mean putting anything from your house, child’s university fees, savings, car and other belongings at risk.
In addition to this, sometimes the agreements can be vague, so it’s important that you understand exactly what the terms are before committing yourself to such an agreement.
How can I make it work for my company?
The main thing is to understand the real implications of providing a personal guarantee. Business owners and directors can do this by examining your finances in detail and understanding all opportunities of gaining capital. There may be other ways without putting your belongings at risk.
However, if you have a high value of assets, you could get yourself really good rates on lending and get the capital you need to really hit the ground running with your new business. Most businesses owners understand the risk of starting up a company and running a small business but need the injection of cash to really make a go of it. Any business may fail, but with the right funding and attitude you could avoid the risks and run a successful business to secure your future.