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When taking out a loan for a business, you have the option of a secured loan or an unsecured loan. While many would prefer to obtain an unsecured loan, sometimes a secured loan is all that is on offer, particularly if the business is a new start-up or has a poor credit rating.
Secured business loans require collateral to be provided, which the lender can call upon in the event of default. In many cases, the security put forward is a physical asset, such as property, a piece of equipment, or a vehicle.
It’s possible, though, to obtain a secured loan even if your business doesn’t own any assets. You have to provide a personal guarantee, so how does this work and what are the potential implications for your finances?
A personal guarantee is a legal commitment to repay a business loan if your company cannot pay. It provides the lender with the security they need to minimise the risk of lending to you.
By securing the loan in this way, your chances of being accepted for borrowing are significantly improved and you may also gain access to better interest rates and more favourable terms in general.
Improves your eligibility for a loan
If your company has no assets because it’s relatively new or the type of business means that significant assets aren’t required, offering a personal guarantee can make it easier to qualify. This is because the lender can recover their money through the guarantee if you default.
Flexibility to grow your business
A loan secured by personal guarantee provides working capital to develop and expand your business. You might use it to acquire equipment or machinery that considerably boosts output, for example, or expand your workforce and improve productivity in general.
Potential for lower interest rates
Providing security for the lender encourages them to offer you better interest rates as their risk is reduced by the personal guarantee. Lower interest rates can make a notable difference to your monthly outgoings, support expansion plans, and reduce pressure on cash flow.
A personal guarantee is legally binding and if the company suffers financial distress to the point where it cannot repay, payment of the entire loan amount becomes your personal responsibility.
It’s important to gain a balanced perspective on personal guarantees, therefore, and fully understand the possible implications for you and your finances. Essentially, if you cannot repay, the lender could pursue you through the courts and enforce bankruptcy.
Obtaining a loan secured by a personal guarantee opens up many opportunities for your company. The money may be fundamental to its growth and provide vital support for cash flow day-to-day.
It’s crucial to obtain professional guidance before offering a personal guarantee to a lender, however, as you may be able to negotiate a cap on the guaranteed amount or perhaps obtain personal guarantee insurance.
Please get in touch with UK Business Finance to find out more. We can guide you towards the best types of loans for your business and offer the professional advice you need going forward.
We work across a wide range of sectors throughout the UK, providing specialist advice to each sector.
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