Why Would I Personally Guarantee Financing if the Lease Is in My Business’ Name?
Small business owners frequently need to offer a personal guarantee to get commercial financing. Sometimes, these guarantees can cause anxiety for owners — it’s a little uncomfortable to put your personal assets on the line to secure the financing you need. So, why do lenders ask business owners for these personal guarantees?
In this article, we’ll talk about personal guarantees, including why lenders want them and how they work.
Why Lenders Want Personal Guarantees
Small businesses may have a limited credit history, which means they pose a fair amount of risk to a lender. Credit history is often the first thing a lender looks at when working to approve your loan. A lack of credit history can make it more difficult for a lender to understand how you’ve treated lending institutions in the past.
When a business owner provides a personal guarantee to secure a loan, they are promising to pay back the loan personally if their business defaults. Because of their flexibility, personal guarantees have become more common in recent years, especially since the payday loans New Mexico 2008 financial crisis and recession.
Personal guarantees are often used as an alternative to loan covenants. A loan covenant is a clause in a loan where the borrower agrees to certain conditions and restrictions. Loan covenants can serve a purpose, but for most borrowers, a personal guarantee is simpler and more flexible. Some loan covenants can be overly restrictive and complicated, which may cause borrowers to violate the covenant on accident, possibly without even knowing it.
