What is a Personal Guarantee?
A Personal Guarantee is a letter of promise issued by an individual to repay the credit taken by their business in case of failure in payment. A Personal Guarantee helps new businesses get credit when the business credit history is insufficient to get the credit on their own. Providing a Personal Guarantee means when a business is unable to pay the debt then the guarantor will become liable for that debt.
What does a personal guarantor mean?
A personal guarantee is a promise made by an individual to repay the loan if their business fails to do so. A guarantor might be an individual or an organization who provides their trust for the getting the loan. For instance, a newly started business (ABC company) wants a loan from the bank, because it is newly started and it doesn’t have any credit history on the basis of which a bank can approve the loan. In such a situation, a guarantor who has a good credit history can help that business to get the loan by providing their trust to the respective banks. The guarantor will also be responsible for the debt taken by the business.
How to write a personal guarantee letter?
Every personal guarantee letter should include the following things. Name and address of the guarantor: This includes the name and address of the guarantor who will be responsible for the loan if the business fails to do so. Name and address of the business: The name and address of the business that is applying for the loan should be clearly written in a personal guarantee letter. Types of guarantee: It is very important to mention the type of guarantee. For instance, a guarantor might be responsible for a limited or unlimited guarantee. In case of a limited guarantee, the total percentage of the guarantee should be clearly mentioned. Signature of both parties: The signature of both parties is required to validate the document. This will also act as legal proof in case of any dispute that may arise in the future. Witness name, address, and signature: Witness name and signature are required to validate the authenticity of the document.
Why do banks require a personal guarantee?
The main purpose of having a personal guarantee is risk minimization. It not only reduces the bank risk associated with the loan but also provides an opportunity for the bank to cease the personal guarantor assets if the loans are not paid on time.
What are the types of personal guarantees?
Basically, there are two types.ie; limited and unlimited guarantee. Limited guarantee: A limited guarantee allows a bank to collect a certain percentage of their assets if their business fails to pay the debt. The liability percentage is already fixed while signing a personal guarantee form. Unlimited guarantee: An unlimited guarantee allows a bank or lender to collect their assets equivalent to the loan amount.
Conclusion
A personal guarantee allows new businesses an opportunity to get the required loans without having a good credit history. The main purpose of using a personal guarantee is risk minimization and helping businesses that are relatively new with no credit history.
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