A personally guaranteed loan occurs when business owners have their personal finances tied to their business. They might also find that this is the only loan that is readily available.
One should evaluate the risks before getting this as it can really affect the business in the long run.
The main risk is when borrowers fail to repay and lenders may go after their personal assets. Depending on the type of loan, there is a possibility that these lenders can even foreclose the borrowers’ home or sell their investments.
Personal guarantee in loans can create a huge impact not only to assets but also to one’s family. The possibility of losing their home is not a good thing to consider. Some loans would require the spouse’s guarantee. Therefore, assets held solely in the spouse’s name will be affected as well. A borrower might get tempted to transfer the assets to their spouse.
It is also a problem if one’s partner who personally guaranteed the business loan cannot make the payment. The bank may demand the entire balance from the main applicant alone. This applies to contract terms of ‘joint and several’.
Over time, business owners are not advised to have personal guarantee business loans as an option. Once they build credit for their business and gather assets for collateral, they can stop guaranteeing loans.
Which brings us to a better alternative of business loans no personal guarantee. This is a type of loan that small business owners usually look for. It becomes an ideal option because it lets them separate their personal finances from the business risk. It prevents them from risking their personal assets and credit on the line, should anything bad happens to the business.
Most of the time, banks only require personal guarantees since they want to be sure business owners would have enough collateral to secure the loan. As a result, business owners have a difficult time gaining access to cash. No PG business loans for small business owners are seldom available and may also be quite hard to attain because of several requirements like tax returns, minimum credit score, business plans and these make borrowers spend valuable time at bank locations.
With the lending guidelines being tightened down by the banks, business owners need access to working capital to grow their business. An option like no personal guarantee for the business loan can help business owners along the way.