Understanding Personal Guarantees and Their Risks
In the realm of business finance, loan agreements play a vital role in funding the growth of your business. However, many lenders may require a personal guarantee for this business loan, introducing an element of risk to consider when seeking finance.
So, what does offering a personal guarantee on a secured loan actually entail? And what are the principal risks of becoming a guarantor?
Understanding the key risks of a personal guarantee
When you agree to offer a personal guarantee, you’re essentially promising to repay the loan if the business can't make the payments – and to do this out of your own money or assets. This might seem like a small step to take, but giving a personal guarantee can have serious consequences if your business is unable to repay the loan.
Here are some of the risks of giving a personal guarantee:
Personal liability – by signing a personal guarantee for the loan, you're putting your own personal assets on the line. If your business defaults on the loan, the lender can come after your personal assets to collect the debt. This means your home, car, savings, and other personal assets are all fair game and could be at risk.
Negative impact on credit score – if the lender comes after your personal assets, this can have a negative impact on your personal credit score. As a result, it could become more difficult for you to obtain credit in the future. Lenders will see you as a higher risk, which could affect your ability to borrow, take out a mortgage or find personal finance.
Strained relationships – when you're asked to give a personal guarantee by a business partner or family member, this can put a strain on your business and personal relationships. Having to repay the loan from your own assets can cause resentment, mistrust, and ongoing problems between you and your partner or family member.
Difficulty obtaining credit for your business – giving a personal guarantee for a loan may get the business out of a short-term financial hole. But when the business relies on personal loans from directors, this can impact your ability to obtain credit for your business in the future. Lenders see this as a risk and may be less likely to extend credit.
Risk of bankruptcy – if the business can’t repay the loan and the lender comes after your personal assets, this has the potential to push you into personal bankruptcy. Becoming bankrupt can have serious long-term consequences, including difficulty obtaining credit, loss of assets, and damage to your credit score.
Talk to us about your business finance plans and credit score check
If you’re planning on taking out a business loan, it’s important to consider the possible risks, including how it may affect your credit score. Make sure you understand the risks involved and have a plan in place for repaying the loan if the worst happens and the business can’t meet the repayments.
We can help you work out a strategy for your business finance plans and provide insights into credit score checks and credit score boosting. We can also connect you with a suitable independent financial adviser or legal expert to explore the risk threats and personal guarantee insurance options available in the UK. Being informed and prepared is key to making sound financial decisions for your business's success.