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Personal guarantees are the key to securing business loans, especially if you want a good deal. But there are several different kinds of personal guarantees that a lender may ask for. Here’s the breakdown of what they mean and how they could affect you.
Unlimited
An unlimited personal guarantee means any and all assets that you own personally are put up as security. This includes cars, boats, property, stocks, savings, and similar, whether owned now or gained in the future.
Pros
- Unlimited guarantees are powerful pieces of security, providing your financier with more security which means you may have a higher chance of your business loan application being accepted.
Cons
- In the unfortunate case of costs being recovered, an unlimited personal guarantee means a lot (or all) of your personal assets could be sold to cover the debts.
You should also know:
An unlimited guarantee also covers all the legal costs incurred by the lender in cases of recoveries.
Limited
A limited personal guarantee is just that: ‘limited’ in some way. This usually means that it only applies to a specific set of assets that you and your lender agree to at the start of the loan. It doesn’t include future assets either. If the borrower can’t meet their loan obligations, only those agreed assets can be recovered.
Pros
- A limited guarantee can heavily reduce the amount that you’re responsible for should things go awry. It still acts as a strong security, however, and increases your chances of having an application for credit accepted.
- Limited guarantees only cover those assets that are agreed at the start of the guarantee – nothing you gain in the future.
Cons
- A limited guarantee is not as strong a security as an unlimited guarantee, so it may not be an option for certain types of lending or for those with bad credit history.
You should also know:
A limited personal guarantee might also include a “bad boy” guarantee or clause. This describes those circumstances in which a limited personal guarantee can be upgraded to an unlimited one. This usually involves cases of fraud and other unethical or illegal behaviour. This allows the lender to recover their costs more effectively.
Bad boy guarantees shouldn’t be a concern for most borrowers, but make sure you read through the details to ensure you aren’t at risk of having your limited guarantee upgraded unfairly or unexpectedly.
Several
A several guarantee is specifically for several borrowers, such as co-owners of a business. Each person is held individually responsible. That means that if one person stops paying, the lender can pursue that person, and that person only, to recover their costs.
Pros
- Several guarantees let you bring multiple people into the agreement, spreading the responsibility around and ensuring that nobody is shouldering the entire burden.
Cons
- With several people in the mix with the personal guarantee, the personal finances of every co-borrower are considered. So everybody needs to have good financials, or the application may be refused.
You should also know:
Several guarantees can also be limited or unlimited. Each co-borrower could have a personal guarantee over their homes and their homes alone (limited), or they could each use all of their personal assets (unlimited).
Joint and several
A joint and several guarantee is a guarantee with multiple co-borrowers where the group is held responsible for the repayment of the loan. This makes it distinct from a several guarantee in that should repayments stop, the lender can move to recover costs from anyone in the group, not just the one specific person that stopped repayments.
Pros
- The co-borrowers share the responsibility of repaying the loan. This might be useful if one of the borrower’s had bad credit and couldn’t get a loan other than with others with a better credit rating.
Cons
- Each co-borrower must rely on the others to fulfill their side of the loan, or otherwise be ready to pick up the slack or risk a default.
You should also know:
Like a several guarantee, a joint and several guarantee can also be limited or unlimited.
For more information or to begin a business loan application, get in touch with us on 0508 438 227 or make an online enquiry today.
This article is solely for information purposes and is not intended to be financial advice. If you need help, please contact Avanti Finance or your financial adviser. Neither Avanti Finance nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any information, representation or omission, whether negligent or otherwise, contained in this publication. References to third-party websites are provided for your convenience only. Avanti Finance accepts no responsibility for the availability or content of such websites.