What are the risks of taking out a personal guarantee on a loan?

To fund the growth of your business, you’ll almost certainly need to take out a business loan at some point. This could be through ANZ, ASB, Westpac, etc. Many lenders will ask you to provide a personal guarantee against this business loan – and there’s a risk element to consider when taking out finance.

So, what does offering a personal guarantee on a secured loan actually entail? And what are the principal risks of becoming a guarantor?

Understanding the key risks of a personal guarantee

When you agree to offer a personal guarantee, you’re essentially promising to repay the loan if the business can’t make the payments – and to do this out of your own money or assets. This might seem like a small step to take, but giving a personal guarantee can have serious consequences if your business is unable to repay the loan.

Let’s look at some of the risks of giving a personal guarantee below.

Personal liability

By signing a personal guarantee for the loan, you’re putting your own personal assets on the line. If your business defaults on the loan, the lender can come after your personal assets to collect the debt. This means your home, car, savings, and other personal assets are all fair game and could be at risk.

Negative impact on credit score

If the lender comes after your personal assets, this can have a negative impact on your personal credit score. As a result, it could become more difficult for you to obtain credit in the future. Lenders will see you as a higher risk, which could affect your ability to borrow, take out a mortgage or find personal finance.

Strained relationships 

When you’re asked to give a personal guarantee by a business partner or family member, this can put a strain on your business and personal relationships. Having to repay the loan from your own assets can cause resentment, mistrust and ongoing problems between you and your partner, or family member.

Difficulty obtaining credit for your business

Giving a personal guarantee for a loan may get the business out of a short-term financial hole. But when the business relies on personal loans from directors, this can impact your ability to obtain credit for your business in the future. Lenders see this as a risk and may be less likely to extend credit.

Risk of bankruptcy

If the business can’t repay the loan and the lender comes after your personal assets, this has the potential to push you into personal bankruptcy. Becoming bankrupt can have serious long-term consequences, including difficulty obtaining credit, loss of assets and damage to your credit score.

Talk to us about your business finance plans

If you’re planning on taking out a business loan, it’s important to consider the possible risks. Make sure you understand the risks involved and have a plan in place for repaying the loan if the worst happens and the business can’t meet the repayments.

Our team of experienced Business Advisors can help you work out a strategy for your business finance plans. We can also connect you with a suitable independent financial adviser or legal expert to explore the risk threats, should there be a need. Whatever your long-term goals are, get in touch with us today.