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Why Do Lenders Require a Personal Guarantee Before You Can Borrow?

Personal Guarantee for Credit Loan

One of our co-founders, Steven Uster, just wrote a new article for PROFIT Guide magazine. It’s a great discussion on why lenders sometimes require personal guarantees from business owners.

Take a look at this quick overview:

As a business owner you may have been asked to give out a personal guarantee when you approached a lender, meaning that you will bear personal responsibility should your company go bankrupt or if it fails to repay the business loan.

Typically, business owners go to great lengths to avoid personal guarantee or any scenario where their personal assets are jeopardized by their business’ failure. That’s why you may be wondering why lenders are so intent on asking for a personal guarantee. There are at least three main reasons for this:

 

1. Dissymmetry of Information

A lender is taking a risk by lending money to someone they don’t know, so they want that person to be risk something, too.

2. Skin in the Game

A lender is taking a risk by lending money to someone they don’t know, so they want that person to be risk something, too.

3. Cooperation in Default

If your business is in a critical situation, a lender will want you to try everything before you default. However, if you aren’t risking your own money, they’ll think you may not be as committed to reviving your business.

Click here to read the full text of Steven’s article.

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