Securing a business loan is not a cinch. You will need to show a strong business credit score. The size of collateral is also worth considering if you are looking to take out a secured business loan. When you fail to meet all these requirements, your lender will require you to arrange guarantor business loans.
A lender might seek a guarantor if your business is a start-up and does not seem to be generating enough profits for your business and your credit score is bad. Every lender has their own criteria to decide your eligibility to borrow money. Despite the fact that you have a considerable size of collateral, your lender might require you to arrange a guarantor.
A guarantor is a third person with a good credit score who will be responsible to pay off the debt in full in case you make a default.
Guarantor loans carry higher interest rates than standard business loans. In case you make a default, the credit rating of your guarantor will also be affected along with yours.
What are the upsides and downsides of guarantor business loans?
Here are the pros of guarantor business loans:
- You can get access to money despite a poor or limited credit history.
- You can improve your credit score provided you pay off the debt on time. It will improve your chances of borrowing money down the line.
- Since your lender can call upon a guarantor when you make a default, it lowers their risk involved in lending you money. As a result, you qualify for competitive interest rates.
- The presence of a guarantor can help you borrow a larger sum of money.
Here are the cons of guarantor business loans:
- Your relationship with a guarantor can be spoilt because your default can take a toll on their credit rating.
- It is less likely that someone will act as a guarantor because of the implication of your default on their credit scores.
- Interest rates will be very high for bad credit borrowers.
- Not all lenders will be willing to offer you a guarantor business loan, so you will have very restricted options.
What is a personal guarantee?
When your business has a separate identity, it is not necessary to arrange guarantor business loans. Your lender can seek your personal loan guarantee. A personal guarantee is an agreement between you and your lender that binds you to be personally responsible for the debt payment when your business fails.
Giving a personal guarantee means your personal assets are at risk. You should always ask a solicitor before considering this option. Lenders will require you to give a personal guarantee when:
- Your credit score is little or bad.
- You are unable to provide collateral.
Personal guarantees are often subject to various types of loans such as
- Business loans
- Invoice financing
- Asset leases
- Business mortgages
- Property leases
What are the advantages and disadvantages of a personal guarantee?
Here are some of the advantages of a personal guarantee:
- You will access to funds faster because your personal guarantee lowers the risk of your lender. This is especially true if you are a start-up and your credit history is poor
- You are more likely to get lower interest rates when you give a personal guarantee.
- Of course, your business will grow when you get the desired sum of money.
Here are the drawbacks of a personal guarantee:
- Your credit score will be brutally damaged if you fail to pay off the debt after your business becomes fail to do so.
- You are likely to suffer huge financial losses because your personal assets like your home, car and investments can be used to settle the business debt.
What are the alternatives to guarantor business loans?
It can be difficult to have someone acting like a guarantor. Giving a personal guarantee can also be very risky. In such scenarios, you should try to arrange bigger collateral. Choose a secured business loan. You will likely get lower interest rates than guarantor business loans because your lender can liquidate your asset to recover their money in case of a default.
With secured business loans you are not at risk of losing any assets other than secured. Your lender will generally seek an asset that increases in value over time. You should talk to business finance brokers as they can help you choose the best funding option for your business.
To wrap up
Guarantor business loans can help you borrow money when your credit score is poor and your business does not have a strong repaying capacity. You can even consider giving a personal guarantee as well to secure a loan. Both options are expensive and limited. You should carefully weigh up their advantages and disadvantages before considering your options.