What is a personal guarantee?
A personal guarantee is an individual’s legal promise to repay the credit granted to a company for which he serves as an executive or partner. Providing a personal guarantee means that if the business becomes unable to repay its debt, the person is personally liable. The personal guarantee offers an additional level of protection to credit issuers, who want to ensure that they are reimbursed.
Understanding the personal guarantee
A personal guarantee can be used in a credit agreement to guarantee the financing of a business. Founders and managers of small businesses often use a personal guarantee because they have a vested interest in starting and developing a business. Often, owners and managers of small businesses will make a substantial initial investment using their own capital. To obtain additional capital, executives can also seek financing with the support of a personal guarantee. This forces the company to pay monthly payments to creditors rather than generating a return for equity investors.
With a personal guarantee, a manager can pledge his own assets and agree to repay a debt from personal capital in the event of default. A personal guarantee gives the creditor a legal claim on the personal assets of the individual, which can make credit more accessible for a business and also improve the conditions that will be based on the profile of the business and the individual in the subscription process.
A person seeking to provide a personal credit guarantee will need to include their own credit history and profile in the credit application process as well as credit information for the business. In some cases, a small business may have little or no credit history for lenders. Thus, the profile of the associate manager constitutes the main basis for the subscription.
A small business loan or credit card application usually requires an employer identification number and details on the financial statements of the business. If a personal guarantee is used, it will also require the person’s social security number for a firm credit check as well as details of the person’s personal income. Some lenders may also require detailed information about the individual’s personal assets.
Business owners should be especially careful when applying for a professional credit card, as the conditions may require a personal guarantee from the applicant. Applicants should search for terms such as “you, as an individual and the company’s authorizing officer … agree to be jointly and severally liable with the company for all costs charged to the account”.
Well-established companies that have a significant commercial credit profile may be able to obtain credit without personal collateral. However, if a personal guarantee is used to obtain credit, the person is responsible for default. The use of a personal guarantee gives the creditor a right to an individual’s personal property for a specific loan or credit card. Credit with a personal guarantee can be an inexpensive way for a business to obtain funds. However, if the business fails to generate income and profits, a person could suffer significant losses. A personal guarantee gives a creditor the right to all of an individual’s personal property. This can include checking accounts, savings accounts, cars and real estate. Thus, individuals should exercise due diligence on their business prospects and income potential before pledging assets to creditors.