Unsecured finance can be confusing, especially for new business owners. If you’re looking for funding to get your business moving and don’t want to get wrapped up in the nuts and bolts, this article will help.
Here we explore all aspects of personal guarantees for unsecured business loans. After reading you’ll know what they are, when they’re used, and how they can position your business for success.
What is a personal guarantee?
Put simply, a personal guarantee is a written promise to repay a business loan if the company borrowing the money defaults.
It is an unsecured written agreement, usually from a business owner or director, which guarantees they will repay a lease, loan or other debt if the business is unable to do so.
The person signing the guarantee is known as a guarantor, and it is important they understand what they are agreeing to do. In the event of non-payment, a personal guarantee allows the lender to legitimately pursue any of their personal assets. If you are going to be a guarantor, ask yourself whether you are happy with the arrangement before signing anything.
Is a personal guarantee always required for an unsecured loan?
A personal guarantee is not always required, but many lenders will choose to ask for one on an unsecured loan.
Unsecured business loans do not require you to offer any collateral in order to borrow money. This means that your business assets, or even personal assets like your family home, are safe. Unsecured loans are available to businesses which demonstrate their ability to repay, via appropriate levels of income and credit rating, but lenders consider a personal guarantee to be an extra layer of security, providing peace of mind to both sides.
Why do lenders need a personal guarantee?
Lenders like a certain amount of assurance that the money they loan will be paid back, regardless of circumstances. When someone offers their personal guarantee on a loan, they are effectively committing to honour the terms of the loan, highlighting and underlining that a business owner is honest and responsible.
The bottom line when it comes to unsecured business loans is this: if the business owner isn't willing to stand behind their business, it raises questions about whether the lender should be expected to.
Do I need to guarantee my unsecured business loan?
Loans vary widely in amount, terms, and repayment period. The security required on each loan will vary between applications.
Security can include any combination of a personal guarantee and assets owned by the business. The level of security will always depend on the loan amount, the purpose of the loan, and the repayment schedule.
The decision as to whether a guarantee is required will be based on a combination of the applicant’s credit score, the amount loaned, and the legitimacy of the business projection.
For instance, when companies don't have a complete and full trading history or have defaulted on loans in the past, then a personal guarantee might be necessary before the lender will consider offering money.
However, this isn't always the case for unsecured business loans, and solutions can be found to overcome or negotiate repayment for a variety of reasons.
Factors influencing a personal guarantee:
Unstable trading history
Unique industry sector where performance and profitability are harder to predict
A large shortfall in the amount of capital required
The requested duration of the loan
A limited amount of management accounts
The applicant is a new start-up (with no credit or trading history)
Who should be the guarantor of an unsecured business loan?
If you are the business owner, or if you have a significant stake in the company, then you may have a responsibility to cover the loan obligations of the business.
Many owners of SMEs will have their own finances linked in some way to their business activities. In many cases spouses or partners will have a shareholding or stake in the business too, making them equally liable for servicing any future debts.
Like every major investment, secured and unsecured business loans will seek as much information as possible before offering repayment terms. Some lenders might require a guarantee, others may decide it's not necessary.
If you’d like to learn more about personal guarantees, or you’re interested in seeking unsecured funding for your business, get in touch with our team of dedicated experts. We’ll be happy to help.