Personal guarantees in P2P lending

Introduction

When you begin to investigate your financial choices for your company, you may get familiar with some unfamiliar words. This is especially true if your company has never previously sought outside funding. Finding the appropriate money and securing it in a timely manner may be challenging for some smaller companies. You should always be prepared for the possibility that you may have to go through a few more hoops than you had originally anticipated.

Before providing financing to a smaller company, traditional financial institutions and even peer-to-peer lenders may often want additional security guarantees. This is often presented in the form of a personal guarantee.  A personal guarantee has the same legal weight as a corporate one. Therefore, despite the fact that it could seem to be a no-brainer to assist you in securing the finances you need to expand, it is essential to look at the bigger picture.

Before you put your name on the dotted line, we will walk you through the fundamentals of personal guarantees and the most important questions to ask yourself.

WHAT IS "PERSONAL GUARANTEE"?

A Personal Guarantee, sometimes known as a "PG," is a kind of collateral security that an individual may provide. When a peer-to-peer lender requests a personal guarantee, they are asking you to make a commitment that you will return the credit or debt they have granted to your firm in the event that it is unable to do so. To put it another way, it serves as a kind of security for them in the event that your company is unable to keep up with payments when they are due.

Because you are promising the lender that you will be able to make the payments, it is essential that you have a solid understanding of the repercussions that this will have.

WHY IS A PERSONAL GUARANTEE REQUIRED?

Your decision on whether or not to commit to a personal guarantee is completely up to you. But providing a personal guarantee provides an additional layer of safety to the lender or creditor, which might be beneficial to your application.

They are a technique to assure that they will be paid even in the event that the firm does not fulfil its obligations. This is a common question that lenders pose to small firms, especially those that haven't been operating for very long or do not have a credit history that is extensive enough. It's a practice that's very popular, and it's a technique to make your company a more appealing candidate for financial aid.

ADVANTAGES AND DISADVANTAGES OF PERSONAL GUARANTEES

It's possible that a personal guarantee won't seem like a huge concern if things are running well and you're searching for financial assistance to help your company expand. They are an easy method to get the financing you need, which you would not have been able to get otherwise due to other circumstances.

However, if the borrower is experiencing significant financial difficulties, you may be less enthusiastic about guaranteeing payments forever. The most obvious benefit is that they may assist you in acquiring the necessary financing for your company.

When it comes to gaining access to cash or credit, it might be the difference between being successful and being unsuccessful. You will be able to finance your expansion ambitions and push your company to new heights if you take out a loan or use invoice financing. However, there are a number of dangers that you need to take into account before moving further. To begin, it's a matter of making a personal commitment. In the event that your firm goes bankrupt, it will be up to you to handle the management of any outstanding debts.

That may put a significant burden on your finances, depending on the interest rate that you are able to get. It has caused long-term issues for certain directors' personal credit ratings, and in other cases it has even led to personal financial ruin. If you were forced to file for bankruptcy, you would lose your ability to serve as a director of a corporation unless the court gave you permission to do so.

Be sure that you are aware of the possibility that anything that seems to be purely hypothetical might result in you being held personally responsible for huge debts.

HOW DOES A PERSONAL GUARANTEE IN P2P LENDING WORKS?

On a loan or credit application, the company owner (or "principal") will be listed as a co-signer. The lender or creditor may take use of the guarantee according to the conditions outlined in your contract. First, you should know that there are two kinds of personal guarantees: restricted and limitless, and we'll get to both of them in a moment. See how they diverge below:

Limited: Enable lenders to collect just the agreed-upon amount, or a predetermined share of the remaining balance, in the event of a default. With a personal guarantee, you may divide the burden of obligation among many people.

You may, for instance, choose on four guiding principles and divide the guarantee amongst them. If the company defaults on its loans, the lender may come after each principal for their 25% part of the total.

Unlimited: Suggest that responsibility lies with a single guarantor. Your personal assets may be subject to repossession by the lender if your company goes into default. like the head of the corporation, for instance.

Increase of 40% in the popularity of P2P loans with personal guarantee protection

In the first half of 2022, demand for Personal Guarantee from small firms that have received financing from Peer to Peer lenders increased by 40% in comparison to H2 2021. There has been a 58% increase in the number of small companies looking for personal guarantee insurance for loans, according to research by Insurance Services.