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Many young and growing businesses need business loans to take their companies to the next level. However, these fledgling firms may not have the collateral traditionally usually employed to secure a standard small business loan. Or they may be unwilling to pledge those assets. In this situation, an unsecured loan may be the right choice. Although no business collateral is required, often a personal guarantee is. Here is what you need to know about this clause before signing:

A personal guarantee means that even if your business cannot repay the loan, you promise to complete the loan payments. In a worst case scenario, the lender will seize your personal assets to recoup its loan fees. That could include your home, automobiles or even your savings account.

There are several types of personal guarantees that can be attached to business loans. The first type is the unlimited personal guarantee. This gives the lender full power to go after any of your personal assets to get full loan repayment and it also allows for the lender to take any legal fees incurred out of your expenses as well. This type of guarantee is generally required when there is just a single business owner.

When there are two or more business partners, limited personal guarantees are more commonly used. This sets dollar limits on what the lender can seize from the business owner in the event of default. There are two categories of limited personal guarantees: several and joint and several guarantees. Several guarantees assign loan repayment responsibility to each business owner based on his or her ownership percentage in the company. This provides each partner with peace of mind knowing they have taken on a certain amount of liability and no more.

Joint and several guarantees, on the other hand, allows each business owner to be liable for the full loan amount. If your business fails and your partner either cannot pay his share or mysteriously disappears when it is time to pay up, you could be on the hook for the entire loan amount.

Before signing a personal guarantee on any business loan, having a lawyer review the terms is a smart idea. It is also wise to think through all the possible outcomes of liability you shoulder before deciding if you are willing and able to commit.


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