Why a Lender Might Require Personal Guarantees
A personal guarantee can be used to cover a loan or to convert your assets into cash if you run out of business. It’s often used by small business owners, particularly startups when they need to get a loan. These are good options for a business owner who has a poor credit history, and some lenders can negotiate them. However, before you sign on the dotted line, you should make sure that the terms are reasonable and will be a good deal for you.
The legal differences between personal guarantees and other guarantees are too technical to discuss here. Still, a good lawyer can explain the terms to you, and you can always ask One West any questions you may have.
A personal guarantee is necessary, especially if you’re a startup or a limited liability company (LLC). Your personal liability will be absorbed by the LLC, but a personal guarantee removes the liability protection of an LLC. If you are going to be a member or the spouse of a member of an LLC, you should check with a lawyer before signing on the dotted line.
Whether you’re a startup, or you’re an established company, a personal guarantee is a great way to secure a business loan. It’s important to be aware of what a personal guarantee entails, and how it might affect your business. You should also consider the advantages and disadvantages of a guarantee, and speak with a lawyer before signing on the dotted line.
Sufficient Personal Assets
A personal guarantee is a document that outlines a personal guarantor’s commitment to pay off the business debt and it is usually a limited personal guarantee. For example, the signer of a personal guarantee may not be able to sell his house, pledge his savings accounts, or have other sufficient personal assets to pay off the loan. But there are other ways to waive the limitation, such as pledging a car or real estate as collateral. A good law firm will make sure that the agreement is a wise use of your money, and that the terms are worth the risk.
Know Your Options
Taking the time to understand the importance of a personal guarantee can be worthwhile. If a borrower decides that the offer is a good fit for their business, they must ensure that they have a plan in place to pay back the loan. This will keep them from paying more interest on the loan and will also limit the risk to the borrower’s business.
A personal guarantee may be a requirement from a lender for a small business loan (SBA Loan), or it may be offered on its own. It’s a good idea to read the fine print of a loan and ask your business partners about it. You should also consult a lawyer, accountant, or another business professional for advice before signing on the dotted line. While a personal guarantee is a must for many businesses, it isn’t always the best choice. So if you’re looking to start a fix and flip real estate business, One West can help walk you through and get you started. Call us today!
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