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Personal Guarantee and Business CreditPersonal guarantee and business credit are interrelated as creditors usually ask for a personal guarantee of all owners of a business before granting a loan. Creditors need to be convinced that the business is a low risk investment for them. They do a lot of research including going through the credit reports from the credit reporting agencies such as EquiFax, Dun & Bradstreet and Experian. Once they are convinced by good credit history, and if all the four C's that they research on such as its capacity, capital, character and external conditions are what they seek in a customer, they grant the loan with the additional security of a personal guarantee of all owners or partners of the business.What is a personal guarantee?A personal guarantee is a pledge by someone, other than the borrower, to repay a loan in full if the debtor defaults in its repayment. Let us say a person has only 10% stake in the business and he signs a personal guarantee for a loan secured by the business. He is responsible for the repayment of the full loan amount granted to the company in case the company defaults on payments. The creditors can sue him personally for repayment of the business credit on account of the personal guarantee.Top financial analysts advise to use a personal guarantee only as a last resort while securing a loan. If it is a partnership firm and only one-partner signs a personal guarantee, he may end up paying the whole loan amount incase the firm defaults. People can end up losing not only their business but also all their personal assets. In some cases business credit is extended with personal guarantee where the spouse of the person pledging a personal guarantee has to co-sign. This puts all their personal assets up as collateral for the loan granted to the company. Incase the company defaults; all assets and income of the spouse are on line for debt repayment, which could ruin the business as well as the businessman's personal life. The owners of the business will have to sign a document pledging to repay the loan amount in case the company defaults. Agreeing to a personal guarantee will convince the creditors of a businessman's total commitment to the business. This will help them grant a loan much faster than if there was no personal guarantee. Most businessmen hardly hesitate to sign a personal guarantee, as they totally believe in their business. If however it is a partnership firm and has taken on a new partner, the other partners have to insist the new partner cosign the personal guarantee as a safety measure. In case a business credit with personal guarantee is the only option left to choose, try to negotiate a limited personal guarantee such as for only 25% of the loan. If your personal assets sufficient or in excess of the loan amount, try to convince the creditors not to demand that the spouse cosign the personal guarantee. However the creditor may exercise their right over any asset jointly owned by the businessman and his spouse incase of default. It is better to separate personal finances from business as incase the business dissolves or fails a person may always fall back on his personal assets to make a new start. However if he has pledged a personal guarantee and the business folds up, he ends up with nothing to his name. Business credit with personal guarantee should be the last option for any businessman in order to secure a loan. Several software programs are available to make relevant documents regarding business credit for a business and to keep them well documented.
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