Imagine having a large ship with different sections; one section gets pierced and water floods in. If you've planned correctly, your ship won't sink, because the water has only flooded one bulkhead. Now if you forgot to close your hatch door, or didn't have the foresight in planning for such an occassion, you're floating to the bottom now. It's been nice knowing you!
Personal guarantees to borrow a metaphor from John Malone, can blow-up and sink the ship. On larger commercial loans, some lenders require personal guarantees. Smart investors during easier credit markets always seek to limit their personal guarantees. Dima Berdiev at Inc. Magazine sums up personal guarantees well:
"What is a personal guarantee?
First, a personal guarantee is an unsecured promise from an individual to make loan payments when a small business is not able to do so. Did you notice the word “unsecured”? This is a promise that is not backed up by a specific asset, such as your personal residence, in which case, the asset would be considered collateral.
Why do lenders need it?
This is the question every small business owner wants to hear an answer to, but many lenders are not comfortable spelling out why. The answer is that a personal guarantee is an added assurance that you are serious about your business--and most importantly--serious about repaying the loan. "
Nadav Manham had a great take on personal guarantees, business and financial planners, "[what] leads someone to expose their own money to that kind of risk must make you suspicious about what they are exposing your money to."
Personal guarantees to borrow a metaphor from John Malone, can blow-up and sink the ship. On larger commercial loans, some lenders require personal guarantees. Smart investors during easier credit markets always seek to limit their personal guarantees. Dima Berdiev at Inc. Magazine sums up personal guarantees well:
"What is a personal guarantee?
First, a personal guarantee is an unsecured promise from an individual to make loan payments when a small business is not able to do so. Did you notice the word “unsecured”? This is a promise that is not backed up by a specific asset, such as your personal residence, in which case, the asset would be considered collateral.
Why do lenders need it?
This is the question every small business owner wants to hear an answer to, but many lenders are not comfortable spelling out why. The answer is that a personal guarantee is an added assurance that you are serious about your business--and most importantly--serious about repaying the loan. "
Nadav Manham had a great take on personal guarantees, business and financial planners, "[what] leads someone to expose their own money to that kind of risk must make you suspicious about what they are exposing your money to."
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