Guarantee Business Loan

By: EconomyWatch Content   Date: 23 December 2009

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Most small business loan lenders seek a guarantee about the safety of their funds. Business loans can be sanctioned on the basis of a personal guarantee or a guarantee from a recognized government agency such as the Small Business Administration (SBA). 

Need for a Guarantee Business Loan

Guarantee offers an assurance to the lending agency that their funds are safe and will be repaid. In case of a personal guarantee, the individual gives an unsecured promise that in case the business is unable to repay the loan, it will be the individual’s responsibility to do so. Unsecured promise means that the assurance is not backed by any specific asset as is in the case of collateral.

 

A guarantee shows the individual’s seriousness and commitment towards his business and towards repaying the money borrowed.

 

Lending agencies seek a guarantee for various reasons such as:

ü      To ensure the safety of their funds and the funds of their investors.

ü      To put psychological pressure on the borrowers to make timely payments and repay the loans.

ü      Financial affairs of small businesses are often intertwined with the personal financial affairs of the owners.

 

A guarantee is sought if the lender is not comfortable with the borrower’s financial position and if the borrowing business is small. However, if the borrower’s financial position is very strong, the lending agency may not seek a guarantee. With the growth of business in size and revenue, the requirement for personal guarantee declines.    

 

Another option for seeking a business loan is by getting it guaranteed from the SBA. Although the SBA does not lend funds itself, it works with banks to guarantee business loans for small businesses.

 

Eligibility for SBA Guarantee Business Loan

To qualify for an SBA guaranteed business loan, an applicant needs to show that the cash flows from the proposed venture are adequate to repay the loan.

 

Other factors considered by the SBA before guaranteeing a business loan are:

ü      Good character of the borrower

ü      Management’s ability

ü      Owner’s own equity contribution

ü      Viability of business plan

 

Remember, the SBA guarantee is available for startups or small businesses that are keen to expand.


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