If you have taken up a business loan before or have plans to do so, you might have noticed a personal guarantee requirement as part of the loan agreement. Personal guarantees are becoming an increasingly common condition for loans everywhere, from banks to private lenders. Hence, you might be wondering: Why are personal guarantees important for loans? Do all business loans require a personal guarantee? Are there any unsecured business loans with no personal guarantee requirement?
This article will explore personal guarantees further, including the types of personal guarantees in Singapore and the legal implications of being a guarantor.
What Are Personal Guarantees?
A personal guarantee is an individual’s legal promise to repay a sum of money loaned from a financial institution, should the business become unable to repay the debt. The individual who undertakes this legal promise assumes the personal guarantee liability and is called a guarantor.
Personal guarantees are normally represented by a legal document, either physically or electronically. It can also be within the terms of the loan agreement itself.
Why Are Personal Guarantees Important For Loans?
Personal guarantees are normally required for business loans as it adds an extra layer of protection for banks and private lenders against a business’s failure to repay its debts. Since unsecured business loans do not require collateral, personal guarantees serve as good insurance that the business will try its best to repay the loan to avoid any legal implications.
Additionally, personal guarantees make it more reassuring for banks and private lenders to lend money to businesses. Small businesses in Singapore lack sufficient financial information and this makes it hard for banks and private lenders to assess their default risk.
However, individuals in Singapore have their credit score assessed by the Singapore Credit Bureau. Thus, financial institutions can refer to an individual’s credit bureau report to assess their default risk and receive greater reassurance that a loan can be repaid with these individuals as guarantors for the loan.
What Do You Need To Be A Personal Guarantor?
The following conditions will need to be met in order to be a personal guarantor for a business loan in Singapore:
- Be a stakeholder of the business
- At least 21 years old
- Singaporean or Permanent Resident
- Preferably a good credit history and credit score
- Stable source of income
- Not have any outstanding litigation or bankruptcy charges filed against you
Types Of Personal Guarantees In Singapore
Limited
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. If there is more than one guarantor, they can be held either “severally” or “jointly and severally”. The former indicates that each guarantor is responsible for a predetermined amount or percentage, while the latter means that repayment can be sought from any of the guarantors involved.
Unlimited
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
It is crucial that you consider the financial situation of both yourself and the business before becoming a business loan guarantor. Taking on the personal guarantee liability can be risky as there are many legal implications. If your business is unable to repay the loan, you will have to use your own assets to repay the debt, whether in full or partially depending on your guarantee. Furthermore, should you also be unable to repay the debt, the lender has the right to sue you and hold you personally responsible. Hence, do think twice before deciding to become a personal guarantor.
Get Quik With Poss
Looking for an unsecured business loan without the hassle of personal guarantees? While it’s rare to come across such financing options, even with the aid of financing brokers, at Poss Capital, we understand your needs. Our unsecured business loans do require a personal guarantee but worry not. With Poss Capital, you’ll experience simple, fuss-free borrowing requirements and no early repayment penalties. Get Quik with Poss! Contact us and let us assist you in reaching your business aspirations today, worry-free.
