Many small business owners are surprised if a lender asks for a personal guarantee when they apply for a business loan. Most lenders, including online lenders like OnDeck, require personal guarantees. It reduces the lender’s risk associated with the loan because it gives the lenders the right to pursue a borrower’s personal assets if your business fails to repay the debt.
Because this is a standard practice for most lenders that offer loans to small businesses, it’s nothing to be alarmed about, but it is important you understand how personal guarantees work and what it might mean for your personal finances—in addition to what it means for your business.
What is a Personal Guarantee?
A personal guarantee is just what it sounds like. It gives your lender the right to pursue your (the guarantor’s) personal assets if your business defaults on a business loan.
Small business lenders understand in many cases, that there is a relationship between the financial health of a small business and the financial health of the small business owner. This is one of the reasons why traditional lenders, the SBA, and many online lenders require a personal guarantee.
According to the SBA:
“For all SBA loans, personal guaranties are required from every owner of 20 percent or more of the business, as well as from other individuals who hold key management positions. Whether a guaranty will be secured by personal assets or not is based upon the value of the assets already pledged and the value of the assets personally owned compared to the amount borrowed.”
Most lenders, including the SBA, share the point of view that, “This ensures that the borrower has sufficient personal interest at stake in the business.” And will take all the steps in their power to make each and every periodic payment until the balance of the loan is paid in full.
By agreeing to a personal guarantee, the business borrower is agreeing to be 100 percent personally responsible for repayment of the entire loan amount, in addition to any collection, legal, or other costs related to the loan.
How Could a Personal Guarantee Impact a Borrower’s Personal Finances?
Be aware that if you personally guarantee a small business loan and the company is unable to make timely periodic payments, it will also likely reflect negatively on your personal credit rating. This could also apply to a business credit card or other type of small business debt.
You should also be aware that according to the SBA, and this is the way many lenders look at it:
“You personal guarantee survives most events, such as selling your interest in the company. In other words, if you’ve signed a personal guarantee and you sell the business, your guarantee may still be applicable should the business fail to meet the obligation. However, you may be able to be released from your personal liability by asking the lender to do so (e.g., you may be able to substitute a personal guarantee by the new owner). Alternatively, try to have the company satisfy the outstanding obligation before you sell your interest so there’s no longer anything that you still personally guarantee for the company.”
This is something you might want to talk to your lender about if you think this might be a situation you could face in the future.
Does OnDeck Require a Personal Guarantee?
For many small business owners, it’s likely a personal guarantee will be part of any small business loan. And yes, like many lenders, OnDeck requires a personal guarantee.
If you’re unsure about any loan documents, including those pertaining to personal guarantees, consult a trusted advisor or your attorney to make sure you understand what is required and how that could impact your business.