What is a Personally Guaranteed Loan?
A personally guaranteed loan is a type of loan where an individual guarantees repayment, typically with their personal assets, even if the loan is taken out for a business.
This means that if the business defaults, the lender can go after the guarantor’s personal assets, like their home or savings, to recover the money.
Loans are often personally guaranteed by small business owners who may not have enough business credit or collateral on their own, so they use their personal creditworthiness to help secure the loan. This demonstrates that the borrower is committed to repaying the loan, but it does come with personal risk.
What Happens If You Can’t Repay a Personally Guaranteed Business Loan
If your business cannot repay the loan, your personal guarantee makes you personally liable for repaying the loan instead. It also allows your lender to use collection actions on you, such as:
Collection Calls
If you can’t repay a personally guaranteed loan, the lender will start by contacting you directly to discuss the debt. Representatives from the lender or a collection agency will remind you of the overdue payments. They may seek to work out a repayment plan.
They will usually continue to call repeatedly, even if you ignore the call.
It’s possible to negotiate with the lender to come up with a more manageable payment plan.
A Lawsuit
When you continue to miss payments or fail to communicate with the lender, they can escalate the situation by filing a lawsuit against you.
The lender can earn a judgment against you, legally obligating you to pay back the loan. You may be required to pay back the debt through wage garnishment or asset seizure (see below).
Wage Garnishment
The lender can pursue wage garnishment as a way to collect what you owe.
Wage garnishment is when a portion of your paycheck is automatically deducted by your employer. The deducted amount is sent directly to the lender until the debt is repaid. This has a big impact on your financial situation since it reduces your take-home pay.
Asset Seizure
In more severe cases, the lender may seek to seize assets to recover the debt.
While it depends on the case, lenders could repossess property or garnish funds from your bank accounts. Items like your home, vehicles, or other valuable items can be repossessed and liquidated.
If you’re still unsure what to do, you should talk to a trusted debt professional about your situation. We can help you figure out what options are available and how to proceed.
Book a free consultation with one of our debt advocates to learn about options for repayment. There are more options if you don’t have enough money to repay the debt outright.
Book a confidential, no-obligation consultation today!
Steps to Take if You Owe a Personally Guaranteed Loan
- Communicate with Your Lender: Ignoring the problem won’t make it go away. Communicating with your lender is important for preventing serious collection actions down the line. Be honest with your lender about your financial situation and try to negotiate different repayment terms.
- Seek Professional Advice: Speaking with a debt professional can help you better understand your situation and how to recover. Our team of consumer-only debt advocates who won’t charge upfront fees for talking to us about your debt situation. We’ve helped millions of Canadians understand the debt industry and find the right debt solution for them. Book a free consultation with one of our local debt advocates today!
- Consider Debt Consolidation, Consumer Proposals, and other Debt Relief Options: When we meet with someone struggling with paying off their debt, we take them through all of Canada’s major debt relief options. We discuss the pros and cons of bankruptcy, consumer proposals, debt consolidation, credit counselling, and informal settlement. Some of these options can make paying off your debt easier. However, it’s important to understand that they do come with drawbacks. Talk to a professional about the benefits and drawbacks of each debt solution.
Frequently Asked Questions about Personally Guaranteed Business Loans
Are guaranteed business loans a good idea?
Generally, no, we don’t think guaranteed business loans are a good idea. It’s best practice to keep your business finances and personal finances separated. However, we understand this isn’t possible for every situation, and a personal guarantee may be essential for financing your business.
If you have personally guaranteed a loan, prepare yourself financially to repay the loan, even if you don’t think you’ll need to. You can slowly save up through an emergency fund to pay off the loan if needed. This ensures you aren’t left with a large debt you can’t pay if you become personally liable.
If the loan does end up being repaid through the business, you can use the funds for other emergency expenses. There’s never any harm in having an emergency fund, and it can become a lifesaver in many cases.
Will a personally guaranteed business loan affect my credit?
Yes, a personally guaranteed business loan will affect your credit if the business fails to repay it.
Is there a way to get out of a personal guarantee?
Getting out of a personal guarantee is very difficult. The only way to get out of a personal guarantee is if the lender to formally releases you.
Usually, a lender will only release the guarantor if the loan is in good standing and being repaid by the borrower/business.
Otherwise, you can be formally released if you can negotiate different loan terms with the lender. You can try and negotiate to have yourself removed as a guarantor.
