Owning and running a business in Canada usually requires having access to capital and taking out loans is a common way to finance operations. However, obtaining a loan is not always easy and, in some situations, creditors will require a personal guarantee before providing the loan.
What is a Personal Guarantee?
A personal guarantee is a type of loan guarantee that requires the borrower, who is typically the business owner, to be held personally responsible for repaying the loan in the event that the business cannot. For example, if the business defaults on the loan, the lender may have the right to use the borrower’s personal assets, such as their home or car, to recover the debt.
Requirements for a Personal Guarantee
In order to secure a personal guarantee for a business loan in Canada, creditors will typically require the borrower to provide personal financial information, such as their net worth, income, and assets. They may also require security, such as property that the borrower has legal title to, to back up the guarantee.
For more information about the legal aspects of taking out a personal guarantee loan in Canada, readers may be interested in checking out LawDepot’s Personal Guarantee Form.
Advantages and Disadvantages
Obtaining a personal guarantee offers several advantages to both lenders and borrowers. For the lender, it provides greater loan security since they will have the right to recover their funds from the borrower if the business defaults. For the borrower, it may also allow them to obtain a loan with lower interest rates.
However, there are also a few disadvantages to taking out a personal guarantee. For one, it leaves the borrower personally liable for the debt and creditors may pursue legal action against them to recover the funds if the business is unable to do so. Additionally, it may also limit the borrower’s ability to access other forms of financing in the future, as lenders may view them as too risky of a borrower.
Overall, obtaining a personal guarantee on a business loan in Canada can provide certain advantages to both lenders and borrowers. However, it is important to consider the potential risks and disadvantages carefully before entering into a loan agreement.
Borrowers should also make sure to be honest and forthcoming with their financial information when applying for a loan and consider speaking to a financial advisor to make sure they are not putting themselves into an unreasonably risky situation. Ultimately, by being fully aware of the details of a personal guarantee and the risks involved, borrowers can make a more informed decision about whether or not to proceed.