What is a personal guarantee?
A personal guarantee is a written promise to a lender that you will be personally liable for paying back the money. It also helps to demonstrate to the lender that you’re confident about paying the debt off. If you weren’t confident, it’s unlikely you’d feel comfortable signing a personal guarantee.
Why are they necessary?
Sometimes when you borrow money, you secure the debt you’re taking on against an asset of some kind. This is called collateral. If you fail to repay the debt within the agreed time, the lender can take the asset to make up for the money you still owe them. This is how secured financing works.
In unsecured financing, no assets are put up as collateral. This is usually the only option for individuals or businesses who don’t have many assets but need to borrow funds. However, because there’s nothing to secure the debt against, the lender still needs some reassurance that they’ll get their money back.
Is it worth the risk?
Whether or not signing a personal guarantee is worth the risk is entirely up to you and your business’s situation. If your business is healthy and you’re confident you’ll be able to pay back the loan on time, you’re probably safe to go ahead and make a guarantee.
However, if you’re not certain you’ll be able to pay the money back or if your company’s financial situation isn’t secure, it’s probably going to be a bad decision.
Personal guarantees – if executed correctly – are legally binding, and they could leave you in an awkward position if your business isn’t able to make the repayments.
You can mitigate against the risk of signing one by getting personal guarantee insurance.
Can I make a personal guarantee to Boost Capital?
Yes, we always ask for a personal guarantee when you take out a loan. This is because our loans are unsecured, so we don’t need you to put any assets forward as collateral.