Want to take up a business loan but notice that you need personal guarantees for it? Personal guarantees are becoming an increasingly common condition for loans everywhere, from banks to private lenders. But what exactly are they, and why are they so important for business loans?
What Are Personal Guarantees?
A personal guarantee is an individual’s legal promise to repay a sum of money loaned from a financial institution for their business. It is normally represented by a legal document, and can be physical or electronic. It can also be within the terms of the loan agreement itself.
Why Are Personal Guarantees Important?
Personal guarantees are normally required for business loans as it adds an extra layer of protection for banks and private lenders. When the guarantor signs the document, they will be legally liable for the debt if the business fails to repay it. This thus gives lenders an extra cushion of protection against non-repayment. Since unsecured business loans do not require collateral, personal guarantees serve as good insurance that the business will try as hard as possible to repay the loan, in fear of implicating themselves legally.
In addition, this makes it easier for banks and private lenders to lend money to businesses. Small businesses in Singapore are exempted from producing audited financial statements every year, and also do not have a credit score. This makes it hard for banks and private lenders to assess their risk. Hence, having a personal guarantee can serve to reassure lenders of the business’s repayment, making them more willing to lend to businesses.
What Do You Need To Be A Personal Guarantor?
To be a personal guarantor for a business loan, it is good to have the following qualities:
- Be a stakeholder of the business
- At least 21 years old
- Singaporean or Permanent Resident
- Have a good credit history
- Stable source of income
- Not have any outstanding litigation or bankruptcy charges filed against you
Types Of Personal Guarantees
There are two types of personal guarantees: Limited and Unlimited.
A limited personal guarantee only allows the financial institution to collect a certain amount of money or a certain percentage of the outstanding debt amount.
An unlimited personal guarantee allows the financial institution to collect an amount equivalent to the full amount of the debt.
Legal Implications Of Being A Guarantor
Before becoming a guarantor, you should carefully consider both your financial situation and that of the business. This is very risky, as there are many legal implications that come from being a guarantor. In the case that your business is unable to repay the loan, you will be held liable for the debt. This means you will have to use your own assets to repay the debt, whether in full or partially depending on your guarantee. In addition, if you are unable to repay the debt, the lender can sue you, holding you personally responsible.
Hence, do think twice before deciding to become a personal guarantor. Be sure that the business will be able to pay the loan back on time before committing to anything.
Get Quik With Poss
To get Quik with Poss, you will need a personal guarantee from key stakeholders in the business. Quik are unsecured business loans with simple borrowing requirements and transparent fees, to help you unlock your business’s financial potential. Contact us today to achieve your business goals.