When you are acquiring a loan and you need repay your debts, lenders may ask you for a personal guarantee. A personal guarantee will reduce the risk to your lenders as you are telling the lenders that you will personally repay the debts if the business defaults on the loan. Since it is rare to have a history of business credit established when you initially apply for a loan.
A personal guarantee may be necessary for the lender as they have dealt with other small business owners that defaulted on their loans in the past and left them with debt to pay off. A personal guarantee is the easiest way for a lender to avoid business owners that do not have strong financial records or the motivation necessary to properly run a small business.
The downside to a personal guarantee is the fact that you may end up losing your home or the assets you posted as the guarantee for the loan. Placing your personal assets at risk may leave you high and dry if your business is unable to sustain the loan and you default on the loan.
Having a good credit score will go a long way in your ability to acquire the loan without a personal guarantee. When you have a good credit rating, you can negotiate with lenders to offer you better payment terms and lower interest rates. Due to your good payment history and keeping your debt low, it will be easier for lenders to offer you the money you need for your business.
To establish your business credit, make sure you have your company listed with the credit bureaus. This is the easiest way to be sure that your lenders are sending the information to the right place. Check your business credit report often to see if your lenders are reporting timely information to the credit bureaus.
A personal guarantee is often required of many small business owners until they can prove that you have a solid business record. The best way to focus on building your business credit is to send in your monthly payments before they are invoiced. This shows you are a responsible company and lenders will have a desire to work with you.
To provide the lender with a reduced risk ratio, you must also check your personal credit rating and make sure it's at least above 700. A high score is easier for the lenders to finance and they won't have the same reservations about offing a loan without asking for a personal guarantee. Build your personal credit by reducing your debt to income ratio. You need to focus on paying off your debts in a timely manner. Keep your credit card balances under 30% of the total balance limit in order to build your credit.
Acquiring business loans is not an easy process due to the amount of risk that small businesses come with. A personal guarantee may be the only option you have if you want to acquire the money you need to operate your business. One other thing you can do to convince a lender to offer you money is to keep your business records in tact. You need to have them well-organized to show the lender that you have no problems running a small business. Make sure you file for a business license and all the proper documents to run your business effectively and to become a legal and legitimate organization.
Having good account records with your bank and other lenders will strengthen your business and your ability to acquire future loans. Watch for loan offers that come your way that do not require a personal guarantee as this will help your business grow in a timely manner and it reduces your risk ratio.
Corporate Credit Concepts specializes in personal guarantee. For more information about personal guarantee and how it might benefit your business, please CLICK HERE for a free phone consultation.