Business Loan Guarantee

By: EconomyWatch Content   Date: 28 December 2009

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A personal business loan guarantee is an unsecured promise by a borrower to meet the loan payments in case the business becomes incapable of functioning profitably. Thus, a business owner, who makes the business loan guarantee, acts as a co-signer on the loan. Such a promise is typically not backed by a specific asset; although in case of a limited liability business, a borrower may be required to pledge a personal asset.

 

A personal business loan guarantee, though a risky alternative, is generally an ideal recourse when other financing options are exhausted or deemed infeasible. Additionally, a business owner can consider offering a business loan guarantee to obtain a low interest rate. Lenders are willing to lower the terms of a loan when it is supported by a guarantee, as it demonstrates a borrower’s high level of commitment. The advantage of this is that it reduces the lender’s risk.

Government Business Loan Guarantee

 

A small business owner, hesitant to offer a personal guarantee, can consider SBA loans, which are guaranteed by the federal government. This backing implies that the federal government will undertake the obligation of debt payments when the business owner defaults on the business loan.

 

Government Business Loan Guarantee Programs

Loans under this program are extended by private lenders, with a guarantee or backing by the federal government. Any business that employs hundred individuals or less can qualify for the following government loan programs: 

  • 7(a) Loan Program: These loans are intended for funding small business startups as well as everyday operations. The maximum loan amount under this program is $2 million. However, the SBA-guarantee only covers 85% for a loan amount up to $150,000, and 75% of loans exceeding $150,000. 

  • 504 Loan Program: This is a long-term financing offered at a fixed rate to businesses seeking to purchase assets. Working capital requirements can not be financed with this loan. Such loans come with an SBA guarantee for 50% of the loan amount. 

  • Patriot Express Loan Guarantee Program: Such loans can be acquired for financing all business purchases and operations. The maximum loan size under this program is $500,000 with an SBA guarantee for up to 85% of the loan amount. 

Remember, a guarantee by the SBA does not imply that a borrower is completely freed from the obligation to make a personal business loan guarantee. Most SBA loans require a personally guarantee by business parties with more than 20 percent of the ownership.


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