Any business comes with lot of financial challenges. The owner has to pool up lot of resources to make sure that his business requirements are fulfilled. Just like how entrepreneur looks for a reliable institution for his/her financial needs, lenders also look for security against their loans. The fact that lenders give approval to loans indicates the kind of confidence that they have with small scale businesses.
However it is also their responsibility to see that their clients are loyal and pay the loans on time. They should also analyse what might happen if the borrower is not able to make on time payment. For this purpose they take surety and securities as precautionary measures.
Some acts like taking guarantees from people close to the borrower, taking temporary possession of the assets of the borrower(collateral) and liens are undertaken to make sure that the lenders don’t go in loss in case the borrower defaults his payment.
A personal guarantee acts like a surety to the lender in case of default by the borrowers. Lenders do not bother about how long you have been in business or how financially strong your company is while extending loan. Under this, the personal assets of the borrower are pursued by the bank or any other institution in case of default. It is an unsecured written promise given by the borrower to the lender.
Lenders do this in order to feel confident that in case of failure of payments by businesses they have their personal assets to rely on. This will also make borrowers to make payments on time with fear of forgoing their personal assets. Remember that it is not just a formality and you may have to sacrifice your properties should you not pay.
Lloyd Blankfein, me, the owner of cnntopnews, have a business management degree. Have 3 years of articles write.