Getting a loan or line of credit can be a great way to grow your business. But these financing tools often come with requirements that can put an entrepreneur in a tight spot. The most prominent of these requirements is the personal guarantee, which most banks insist on when giving out business loans.
At Lighter Capital, our approach to lending is geared to be as entrepreneur-friendly as possible. We like to reduce borrowers’ risk and maintain their control and ownership of their company — and the rest of their assets. That’s why we never require personal guarantees from our borrowers, whether for revenue-based financing, term loans, or lines of credit.
Our stance on personal guarantees is only one of the many reasons entrepreneurs tend to find our funding options more appealing than traditional business loans. Our side by side product comparison displays each of their unique funding structures, providing a better understanding of how we differentiate from a traditional bank and helping you determine which option is best for your company.
What is a personal guarantee on a business loan?
A personal guarantee is an agreement obligating the borrower to pay back their business loan personally if the business cannot do so. Almost all lenders of business loans require personal guarantees, so most business owners who take out out a loan will have to sign the agreement and most likely aren’t even aware it may not always be necessary.
As part of the personal guarantee agreement, a lender can take possession of many of a borrower’s personal assets if the borrower fails to pay back their loan. The lender can collect money from your personal bank account, take over other assets, or garnish wages in order to collect payment on the https://worldloans.online/installment-loans-nd/ loan. The business owner who signs such an agreement is betting the vast majority of what they own on their business’s ability to repay.
The way personal guarantees on business loans are structured differ from loan to loan. In some cases, the personal guarantee covers only a portion of the loan. In other cases, it applies to the entire loan, as well as any interest and fees that the borrower might owe. Sometimes, a guarantee may be set up as a limited personal guarantee (for a portion of the loan amount) allowing it to automatically convert into an unlimited personal guarantee (for the entire loan amount) if the borrower takes certain negative actions, such as missing payments. In most cases, however, a lender will impose an unlimited guarantee.
The risks of signing personal guarantees on business loans
Borrowers should think twice before signing a personal guarantee on a business loan. These agreements can spell major trouble for business owners since a bout of mismanagement or a downturn in the market can end up costing a huge personal price. It’s risking everything you’ve ever built or done in your life on a loan.
At Lighter Capital, we look at such arrangements as artificial structures that box founders in, which is the opposite of how we strive to interact with our borrowers. We want founders to be un-boxed by our support — to feel that they can confidently work to grow their ventures without undue stress. Requiring personal guarantees of our borrowers would work counter to this goal, so we choose our borrowers carefully and provide them funding without making them bet their life’s savings on it.
Why do some borrowers agree to sign this agreement?
If personal guarantees are so oppressive, then why do borrowers agree to sign them? The short answer is that it’s often the only way for business owners to get the funding they need, and even if it’s not, they likely aren’t aware they have any alternatives. It’s just the way business is done, and it’s something banks have done forever.
Banks require them because it forces business owners to put more “skin in the game.” The founder can’t walk away; they’re personally liable. Even if a bank knows that a founder doesn’t have a lot of personal assets, the bank might still force them to sign a personal guarantee as a motivator to ensure repayment; it’s about control and leverage.
Unfortunately for many borrowers, agreeing to that form of control is the only way of securing business funding. There are relatively few business funding options, such as Lighter Capital, that don’t carry this requirement.
How Lighter Capital can qualify loans with no personal guarantees
Personal guarantees on business loans are designed to reduce a bank’s risk in lending out money to business owners who may not have a proven track record of repaying loans. In order for a lender to go without personal guarantees, they must have some other way of reducing their risk as they lend to new clients.
At Lighter Capital, our ability to say no to personal guarantees is a function of the specific way we do business as a specialized, alternative lender. We reduce our risk via our thorough, data-driven vetting process for borrowers; we only lend to companies that we assess to be likely to succeed. Since we lend in a particular niche — early-stage SaaS companies — we have a very good sense of what it takes for companies to be viable in that context.
Other lenders with different business models, priorities, and borrower profiles don’t have the luxury of being as choosy in their lending as we are. So personal guarantees are how they ensure they can manage potential losses.
Borrowers should carefully weigh the potential benefits and consequences of taking on a personal guarantee on a business loan before signing on the dotted line. Or, if they’re an early-stage SaaS company, they might want to look at what Lighter Capital has to offer instead.
At Lighter Capital, we’re revolutionizing the business of startup finance – we don’t require a personal guarantee to qualify for a loan. Download our free Alternative Finance Industry Report in which we explore the changing landscape of tech startup financing, analyzing why founders are turning to debt capital options like revenue-based financing to fuel growth.