Do business loans require a personal guarantee?

The majority of business loans in India, especially unsecured types of loans, come with a personal guarantee from the business owner or one of its key stakeholders. A personal guarantee is your agreement to be liable personally for the repayment of the debt if the business is unable to perform its obligation. It provides the lender extra security for newer businesses or ones without significant assets. In secured loans, pledging collateral (property or equipment etc.) may reduce the need for a personal guarantee but not completely eliminated. Lenders consider the business/entity’s overall risk profile in making their lending decision. This is especially true when lending a larger amount of money or when a company has limited history. Before you agree to a personal guarantee, understand the implications; a personal guarantee can have negative credit and asset implications if defaulted on. When you receive the loan documentation make sure to read through any guarantee documentation, and if you are uncertain, seek professional advice. Some micro credit and government schemes do not ask for a personal guarantee requirement, especially for women entrepreneurs and schemes in priority sectors.

There are 2 main types of personal guarantees: limited and unlimited. Limited guarantees cap your liability to a particular amount or percentage. They are commonly used by lenders when there are multiple guarantors. Unlimited guarantees are when one is liable for the whole outstanding loan if a business defaults on a secured loan or business credit. It is important to note that lenders will also typically want to review your personal credit history and may want to see your assets before approving a loan. Before you commit to a business loan agreement, a good understanding of your liability and what type of guarantee is required is important.