Personal guaranteeing is when an individual uses their personal assets and credit to secure a loan or debt-related obligation for a business. This means that if the business fails to meet its financial obligations, the individual’s personal assets and credit will be at risk. It is important to understand the risks involved with personal guaranteeing before entering into any such agreements.
Benefits of Personal Guaranteeing
There are several benefits associated with personal guaranteeing for businesses, especially for new businesses that lack established credit histories. By having an individual guarantee a loan, it can help increase the likelihood that the loan will be approved by lenders as they view it as a form of collateral or security assurance should the business default on its payments. It also allows small businesses to access loans or credit lines that they may not be able to obtain under normal/traditional lending criteria due to their short operating history or limited cash flow.
Risks Associated With Personal Guaranteeing
While there are many potential benefits associated with personal guaranteeing, there are also risks involved. The biggest risk is that if the business default and are unable to make payments on the loan or other debt-related obligations, then all of the individual’s personal assets and credit could be at risk too. Furthermore, in some cases an individual might not just have their own personal liability on the line but could also face potential creditor lawsuits as well which could potentially lead to wage garnishments or bank levies depending on where they live and/or operate their business from legally speaking.
When Is Personal Guaranteeing A Good Idea?
Although offering one’s own personal assets and credit as a form of collateral for a business loan may seem risky, sometimes it can actually be beneficial depending on your situation. If you are confident in your ability to manage finances properly and ensure that debts will never become delinquent then this form of guarantee could help you obtain funds when needed most with a new business or one without business credit established. Additionally, it also provides borrowers with better terms if they have solid track records with lenders due to their previous successful repayment history.