What is a Personal Guarantee?

What is a Personal Guarantee?

When a small business owner applies for a term loan, it is typically to make a one-time investment in a specific growth opportunity. This could be opening a new storefront, expanding or renovating an existing workspace, hiring new employees, or even developing new technology for the business.

For a lender, the primary goal during the underwriting process is to establish two things: whether the business owner has a history of paying back debt, and whether the business will generate enough income throughout the loan term to cover the requisite payments. Approval is an indication of the lender’s confidence in the likelihood of recovering the investment.

Repayment is never a complete certainty. As a result, lenders will typically place a UCC lien on the business’s assets, as recourse in the event of a default. Given that the business’s assets may not cover the full value of outstanding debt, Funding Circle, and many other lenders, also require a personal guarantee from the owners of the business. A personal guarantee is an agreement that gives a lender the right to claim a business owner’s personal assets, to cover outstanding debt obligations in the event of a default.

At Funding Circle, we require a personal guarantee from at least 60% of the ownership of the business. Signing this contract, means that 60% of the ownership agrees to be personally liable for 100% of the outstanding debt. It is important to understand that personal assets are generally not a significant factor in our underwriting process; our risk grades are primarily based on the underlying fundamentals of the business.

Enabling small business growth is our reason for being. Personal guarantees protect our investments, in the event of a worst-case scenario.

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