Personal guarantees should be avoided, but this is not always possible. Personal Guarantees come in two forms: limited and unlimited. Whenever feasible, aim for a limited personal guarantee. With an unlimited personal guarantee, business proprietors bear the burden of the entire loan sum, inclusive of any legal charges, should the borrower default. Such guarantees offer no ceiling on the potential liability for business owners. On the other hand, limited personal guarantees establish a maximum cap on the liability business owners might face in case of non-payment.
A loan backed by a personal guarantee should reflect on your business’s credit history. Your enterprise doesn’t necessarily need stellar credit to secure a loan. A plethora of financing options exist for most businesses. However, it’s vital to thoroughly assess all alternatives understanding the implications and costs for you and your enterprise. Should your business be stable and capable of handling the debt, taking on a personal guarantee is less daunting. Regular oversight of financial matters ensures timely bill payments for your company. However, if you’re not at the helm of the financials, think twice before signing such a guarantee. If things go south with the business, you should be positioned in a manner where your personal financial health isn’t jeopardized. Although personal guarantees can be instrumental in maximizing your credit profile, minimizing or eliminating their usage as your business credit scores is prudent.