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Secured Business Loan-What You Need to Know?

August 31, 2018Business Loans, MSME Finance, MSME LoansSuganya Arumugam

Secured business loans aren’t only secured by physical collateral these days. So if you don’t have a real estate holding, vehicle, or equipment of sufficient valuable to secure your business loan, you’re not out of secured financing options.

Lenders can also give secured business loans by asking borrowers to give a personal guarantee.

What’s a Personal Guarantee?

A personal guarantee is an agreement with your lender that puts your personal assets on the line making you the loan’s co-signer.

When it comes to personal guarantees, the idea isn’t all that different than putting up collateral. It gives lenders a way to minimize their risk when they lend to your business.

If you’ve given your lender a personal guarantee and you default on your loan, you’re personally responsible for repaying the loan.

This means that creditors can claim your personal assets as repayment—whether that’s your home, investment accounts, and so on.

The Difference Between Collateral and Personal Guarantees

The idea behind collateral and personal guarantees is essentially the same: lenders are protecting themselves from the chance that they lose all their money.

But here’s why they mean different things when you use them for secured business loans:

Putting up collateral on a loan requires you to stake one or a few particular assets—like a house or a car. A personal guarantee gives creditors the right to seize any and all financial assets that you have now (or even those you’ll obtain down the road).

  • Unlimited Personal Guarantee

When you secure a business loan with a personal guarantee, you can give lenders an unlimited personal guarantee.

This means that lenders can recover 100% of the loan amount, plus any legal fees associated with the loan.

Let’s look at this in the worst case: your business fails and you default on your loan. Your lender can hire lawyers to gain a judgement in their favor, giving them legal ability to go after any or all of your personal assets you have.

This could be your life savings, your retirement savings, your house, your kid’s education fund—even your spouse’s personal assets are fair game.

Until they reclaim the total cost of the loan, plus interest and legal fees, lenders can seize any personal asset they want.

Sounds pretty unlimited, right? When signing an unlimited personal guarantee, borrowers have basically no financial protection if they couldn’t keep up with their loan payments.

  • Limited Personal Guarantees

As you can probably guess, a limited personal guarantee sets specific parameters on what can be seized from you if you default on your loan. A limited personal guarantee will usually be limited by a dollar amount.

A limited personal guarantee is most often when multiple business partners take out a loan for the company together. So if you have a certain percentage of ownership in your business, you should be prepared to be a part of the guaranteeing process for your company’s business loan.

If you secure an SBA loan, for instance, the SBA requires that anyone with a 20% or greater stake in the business is a part of the guaranteeing process.

When you sign a limited personal guarantee in this scenario, you’re dividing up some of the debt burden in the case that your business defaults on its loan.

When compared to an unlimited personal guarantee, it might seem like a limited personal guarantee means less risk for you. But it depends on what you’re signing.

You’ll want to check if you’re signing a several guarantee or a joint and several guarantee.

You can apply for an attractive offer with best possible rate of interest and terms for Personal Loan, Business Loan , Home Loan and Car Refinance Loan.

Previous post How to get a Secured Business Loan? Next post Saving Schemes – Reasons




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