What Does Personal Guarantee Mean?
A personal guarantee is an arrangement that is signed and verified by a borrower, or a third party, in order to accept the liability for one’s own or a third party’s obligations or funds payable. The lender, or the first party, that takes this guarantee from the borrower, or a third party acting on the borrower's behalf, can attach the guarantor’s personal assets in case the borrower fails to repay the debt or fails to meet any of the obligations covered by the guarantee. The personal guarantee is significant because it acts as a signed blank check. If the borrower defaults on a payment, the lender is directly eligible for the named property or asset without being required to attempt to recover the payment from the borrower. This guarantee is the basis of lending to startups in the absence of collaterals.
Divestopedia Explains Personal Guarantee
When a firm wishes to borrow funds, a personal guarantee signed by the owners or promoters as well as a third person, in some cases, may be insisted upon by the lender. This is especially true for a startup. This guarantee is demanded in order to reduce the risk of a loan default. Many firms have a limited liability status, in which case the partners and shareholders have a very nominal liability. In such cases, the assets of the firm are pledged for a loan, and a personal guarantee, signed by the owners or directors, is the backup for a larger quantum of borrowing. If there is a personal guarantee given by a third party or the partners or directors of the firm, the personal assets of the guarantors can be attached immediately, which ensures the quick recovery of debts and other obligations, without even seeking recovery from the original borrowing firm. Normally, liquidating assets and recovering cash is a lengthy and complicated process, and a personal guarantee provides additional convenience to lenders. From the borrower’s point of view, personal guarantee is not the preferred option. Instead of signing a personal guarantee, a pledging of some specific assets as collateral can be considered by the borrower, in which case the borrower may save some of his or her assets and spousal assets, in case the loan is not repaid in time.