Some lenders may require you to provide a guarantor before granting you a new business loan. A guarantee assures your lender that the loan will be repaid.
Mostly, you’ll encounter two types of guarantees:
- First party guarantee – this is the most common type involving a guarantee through an asset which is under your ownership.
- Third party guarantee – there are also cases where lenders require another person or entity’s guarantee which can also involve their assets.
Why Need for Guarantee
Basically, a guarantee assures your lender that when you cannot make the business loan repayments, the corresponding guarantee will pay in your stead. Most cases and in compliance to the Code of Banking Practices, the lender will require the guarantee some type of limited guarantee. This often includes the debt on top of additional interest or costs should there be delays on loan repayments.
Guarantors must remember that in some cases when borrowers fail to pay the loan, they will be required to sell their asset to cover the rest of the debt. Other cases, they can offer additional security.
What if someone asks you to be a guarantor or you need a guarantor?
You should consider the following:
- There must be confidence in the relationship of the guarantor and borrower that the latter can meet the business loan repayments and that in case of delay, the former is willing to shoulder it.
- The guarantor’s financial plans should not be compromised even with the borrower using the guarantor. Take note that whatever happens, you may have to deal with limited financial capabilities so long as you’re the guarantor.
- You’re willing to go your way to help the borrower or the guarantor is willing to help you.
Business loans can be tricky without the right guidance. If you’re a business looking for capital or access to funds without burdening a guarantor, then you can check out Gapcap’s offerings today!