What is a Personal Guarantee?
A personal guarantee is a type of unsecured loan agreement that allows the lender to acquire the guarantor’s personal assets if the associated debtor defaults on a loan. A guarantor is someone who promises to pay the debtor’s debt in case of default.
Personal guarantees are categorized as unsecured debt for businesses since they are not backed by any specific collateral from the organization, but by personal assets that belong to the guarantor.
Personal Guarantees – Uses
Personal guarantees are commonly used to secure funding for small and medium-sized businesses that find it hard to raise funds through commercial sources due to a lack of credit history. Given that the founders of small and medium-sized companies have a strong incentive for growth and business development, lenders agree to lend based on personal guarantees since they have the right to seize personal assets.
Benefits and Costs
The biggest benefit of a personal guarantee is that it provides an individual or a business with funds that are not easily available to them due to the high risk and lack of credit history. The funds can be used to stimulate growth in the organization and provide financial support to the product development and research areas, which are crucial for small and medium-sized businesses, especially in the early stages.
However, lenders often charge high interest rates and require equity to compensate for the risk that they are taking. Lenders often require business plans and growth trajectories that appeal to them, and creating the memos takes time and effort from entrepreneurs.
- Stock trading and charting platforms often require personal guarantees from an older guarantor when the individual is a minor. Another instance is when the individual takes on an immigrant status in the country, whereby trading platforms often require a personal guarantee from a citizen or a permanent resident of the country.
- Corporate credit cards that are issued to an individual are another example of a personal guarantee. The individual or employee is responsible for the debt that the organization takes on and the overall spending on the credit card. Here, the cardholder takes the role of a guarantor.
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