What You Need to Know About Personal Guarantees in Business Finance
Very few small and medium-sized enterprises (SMEs) have enough cash on hand within their organisation to self-fund growth. Starting or growing your business often means you’ll need external funding. Whether it’s a loan or equipment finance, securing funds can be a challenge. But, what if the lender asks for a personal guarantee? In this guide, we’ll explain what a personal guarantee is, why it matters, and how it fits into business finance.
What is a Personal Guarantee?
A Personal Guarantee is – in a nutshell – a person’s promise to repay credit issued to their business. Typically, director(s) or owner(s) sign this during the application process for finance. It is a legally binding agreement which makes the guarantor personally responsible for ensuring the finance is paid.
When lenders consider offering financing, they want assurance that they’ll get their money back. For businesses with limited credit history or little collateral, a personal guarantee gives them the security they need to proceed with the loan. In many cases, offering a personal guarantee is the key to unlocking crucial funding that could help grow your business.
If the business struggles and is unable to repay the debt at any point, then the person(s) who signed this personal guarantee may become responsible for this debt. As we all know, not all businesses go to plan and, as a result, not all debt is paid back. The personal guarantee is therefore seen as “added security” for lenders.
How to Manage the Risks
A personal guarantee plays a big role in managing risk—for both you and the lender. While it offers a layer of protection for the lender, it also provides you with access to finance that might otherwise be unavailable.
That said, it’s important to weigh the risks and have a plan in place. It’s important you are sure your business is profitable and can make the agreed monthly repayments. A personal guarantee is a common and effective way to secure business funding, but it’s not without it’s risks. Before you sign on the dotted line, make sure you fully understand the implications. Taking independent legal advice from a solicitor is always recommended to ensure you understand your liabilities.
Make the Right Choice for Your Business
At Johnson Reed, we only require a few documents from you to help you acquire the funding you need; banks statements, equipment list, ID checks and a unit to trade out of, as a minimum – plus accounts if you’re established. We are on your side, it’s our job to help you to get the funds to go to the next level.
We help business owners like you navigate these decisions. We’ll work with you to find financing options that make sense for your business security. We’ve been helping all kinds of businesses secure funds for 20 years, and our close relationships with lenders mean we can cherry pick the perfect terms for your needs. Whether you want a cash flow of a few weeks or months to see you past a bump in the road, or a five-year loan to realise your growth plan, you’re in safe hands.
Let’s Talk About Your Financing Options
Ready to take the next step? Contact us today to explore how we can help you secure the funding you need. Let’s work together to find the right financial solution for your business.