Personal guarantees on real estate loans

 

personal guarantees on real estate loans

If you get a loan from a bank or private lender for your business, you will probably be asked to sign a personal guarantee that puts your own assets -- such as real estate, savings, or other valuables -- on the line should your business be unable to pay the bank back. Many business owners are so relieved to get the loan that they don't read the fine print that puts them at risk. You should. And, you should attempt to negotiate.

To be sure, not every entrepreneur will be successful in negotiating the terms of the personal guarantee, especially if you're just starting a business. "Those that will be most successful will be those who have three to five years experience and have survived this most recent [credit] crisis ," says Jim Coughlin, the chief underwriting officer for Asterisk Financial , a personal guarantee insurance company headquartered in Middletown, Conn. "The lender clearly is in the driver's seat almost always -- especially in this credit market -- because they have the cash that the small business owner wants or needs."

But there are ways you can protect yourself, especially if you negotiate with several lenders at once. Here are four things to consider.

Personal guarantees on real estate loans

As a director of a limited company, it is standard practice for lenders (and indeed some suppliers) to request that you sign a Personal Guarantee (PG) to act as security for company borrowing. By doing this, the creditor will have recourse to the director personally in the event the company defaults. PGs are not used for sole traders or partnerships (except LLPs) as any debt of the company is deemed as a personal liability of the business owner(s) and so a PG is not required.

If you have been asked to sign a PG, you should always seek independent legal advice before signing anything as the terms can vary (it is not uncommon for the banks to request a legal charge over your home at the same time). It is also worth noting that most banks will keep a PG on file indefinitely, even once the borrowing has been repaid.

In the event that a PG is called upon, the next step can vary depending on the creditor and the amount being called on. The usual routes are:

If you get a loan from a bank or private lender for your business, you will probably be asked to sign a personal guarantee that puts your own assets -- such as real estate, savings, or other valuables -- on the line should your business be unable to pay the bank back. Many business owners are so relieved to get the loan that they don't read the fine print that puts them at risk. You should. And, you should attempt to negotiate.

To be sure, not every entrepreneur will be successful in negotiating the terms of the personal guarantee, especially if you're just starting a business. "Those that will be most successful will be those who have three to five years experience and have survived this most recent [credit] crisis ," says Jim Coughlin, the chief underwriting officer for Asterisk Financial , a personal guarantee insurance company headquartered in Middletown, Conn. "The lender clearly is in the driver's seat almost always -- especially in this credit market -- because they have the cash that the small business owner wants or needs."

But there are ways you can protect yourself, especially if you negotiate with several lenders at once. Here are four things to consider.

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Getting funding for your business can be a challenge, particularly if you are looking for no personal guarantee loans. In many cases, banks and big name lenders will require that you put up personal assets in addition to business assets as collateral, such as your home, car, or other high value personal investments.

If things go badly, you could lose more than just your business, so it makes sense that this is not something most business owners want to do. No personal guarantee loans do not require any form of personal assets as collateral, and your personal assets are not affected in the event of a default on the loan.