Whether you’re a solopreneur launching a start-up or a small-business owner seeking to grow your company, you might need extra funding. And if youâre looking for business loan, you might need a personal guarantee. Does a personal guarantee impact your credit and your own financial situation? Find out below.
A personal guarantee means you personally promise that a debt will be paid back. If you sign a personal guarantee on a business loan, you are responsible for paying back the money if the business is unable to do so. The lender can try to collect the money from you, including by suing you.
Personal guarantees are all about reducing risk for the lender. If you sign one, it has two potential entities to chase to collect the loan. First, the lender will attempt to collect from the business itself. If the business doesn’t make payments as agreed or defaults on the loan, the lender will try to collect from you personally.
The benefits to the lender are pretty big. They’re much more likely to eventually recoup their investment, even if your business fails. That means many, though not all, small-business loan options do come with a personal guarantee requirement.
Some factors that can increase the chance that a lender might ask for a personal guarantee include:
Whether or not a personal guarantee affects your credit score depends on the situation. First, business loans may or may not be reported on your credit history.
If you sign as a personal guarantor for a traditional business loan, the loan itself will be reported on your business’s credit report. Timely payments on that loan will help build your business’s credit history. Missing a payment could cause the business credit score to take a hit.
In these cases, your personal credit isn’t likely to be impacted. However, if the business defaults on the loan and the lender comes to you for payment, your credit history could start to take a hit. If you immediately make a payment to catch up the loan, you may not see any impact to your personal credit. If, however, you don’t pay and the account goes to collections, that’s likely to show up on both your personal and business credit histories.
Other types of business funding, including some small-business lines of credit and credit cards, do get reported on your personal credit. This can be a good thing if payments are made timely and as agreed, as you could get a bump on that for your own credit score. In the meantime, however, it does potentially impact your credit utilization ratio and your debt-to-income ratio.
This is a personal decision that depends on a variety of factors, including your confidence in the business. But here are a few questions to ask yourself before you take this action, which can have long-lasting consequences on your own personal finances.
Ready to get that business loan? If youâve thought it outâand analyzed your personal financial situationâstart shopping for options today. If youâre wondering where to start, check out the business loans at Credit.com. You can compare rates and requirements, so you can find the right business loan for your needs.
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