When it comes to secured business loans, they aren’t only secured by physical collateral these days. So in case if you don’t have a real estate holding, vehicle, or equipment of sufficient value to secure your business loan, you will not be able to avail of secured financing options.
The lenders can also give secured business loans by just asking the borrowers to give a personal guarantee.
What is a Personal Guarantee?
A personal guarantee is basically an agreement with your lender that puts your personal assets on the line, which makes you the loan’s co-signer.
When it comes to a personal guarantee, the idea is not all that different from putting up with collateral. It will also give lenders a way to minimize their risk when they lend to your business.
But, if you have given your lender a personal guarantee and you default on your loan, then you are personally responsible for repaying the loan.
However, this also means that the creditors can claim your personal assets as repayment. It can also be utilised for your house investment accounts, etc.
The Difference Between a Collateral and Personal Guarantees
The idea behind collateral and personal guarantees is generally just the same. The lenders are protecting themselves from the chance that they might lose all their money.
But here is why they mean different things when you utilize them for a secured business loan.
When putting up collateral on a loan, you must stake one or a few particular assets such as a house or a car. It is also a personal guarantee that gives creditors the right to seize any and all financial assets that you have now or even those with whom you will obtain down the road.
Personal guarantee unlimited:
You can quickly allow the lenders with a personal guarantee unlimited. It will enable you to secure a business loan. It also denotes that the lenders can steadily recover 100% of the loan amount. Any legal fees are associated with the loan.
However, let’s take a look at this in the worst case: If your business fails and you have a default on your loan. Your lender can always hire lawyers to gain a judgement in their favour by giving them legal ability to go after any or all of your personal assets that you may possess.
It can also comprise your life savings, retirement savings, house, your child’s education fund, and your husband’s personal assets are all in the fair game.
Until and unless they reclaim the total cost of the loan along with the interest and legal fees, the lenders will be able to seize any personal asset they want.
So, when you are signing an unlimited personal guarantee, the borrowers have basically no financial protection if you are unable to keep up with your loan payments.
Limited Personal Guarantees:
As you can probably guess when it comes to a limited personal guarantee, it will also place particular parameters on what would be taken from you in case you have defaulted on your loan. It will also be limited by a dollar amount.
When it comes to a limited personal guarantee, it is often when there are multiple business partners that are taking out on a loan for the company together. So in case you have a certain percentage of ownership in your business, you should be ready to take part in the guaranteeing procedure based on your company’s business loan.
Suppose you are able to secure an SBA loan, for example. And, the SBA will need anyone with a 20% or which also contains the most significant stake in the business is a part of the guaranteeing procedure.
When you are signing a personal guarantee which is limited, you are basically splitting up some of the debt burdens if your business loan has defaulted.
And, when compared to a personal guarantee which is unlimited, it would be such as a personal guarantee limited contains lesser risk for you. But at the same time, it is based on what you sign.
