When you begin seeking a small-business loan, you may be asked by your bank, the Small Business Administration, or another financial institution to make a personal guarantee for the loan.
Today, nearly every low-interest lender will ask for a personal guarantee, and doing so essentially serves two purposes: It can increase your chances of getting the loan, and it alleviates some of the risk for the lender.
What Is a Personal Guarantee?
The simple answer is that a personal guarantee is a promise made by the business owner to be liable for the business loan. This often entails ensuring the bank that should you default on the loan, your personal finances, assets or other collateral will be taken as necessary to pay back the loan in part or in full.
Some lenders may allow you the option of discussing and instituting certain conditions that must be met, which can help you limit your liability, but most will require a unlimited, unconditional guarantee.
This all seems very risky, of course, but if you are confident that your business is doing well or will do well in the future, and that you won’t have a problem paying back the loan, then you should be able to work with your bank to secure a small-business loan.
Also, it’s market standard… meaning there are virtually no small-business lenders that do not require personal guarantees. And for those that don’t, you should be prepared to pay interest rates that are anywhere from five to 10 times higher than the APR offered by traditional lenders.
Pros and Cons of Personal Guarantees
- A personal guarantee increases your chances of receiving the small business loan.
- The guarantee often enables you to secure a lower APR.
- You can often negotiate how much you are willing to risk in the guarantee.
- Lenders typically want to see significant personal assets.
- If the business dissolves or you cannot pay back the loan, creditors could seize your assets.
Alternatives to Personal Guarantees
If the idea of making a personal guarantee isn’t so appealing, there aren’t many great options for getting capital for your business. You could seek investors, take on high-interest debt, or borrow on more friendly terms from friends and family.
If you decide to go the third route, check out our Friends and Family product. It’s a pre-packaged friends-and-family loan, where you can set the terms.