Obtaining a small business loan from a bank can be a tricky maneuver. Even some private lenders are not all that eager to lend to certain kinds of businesses. In many cases, banks and private lenders request a guarantor before they agree to write a loan.
If you have ever been in that position, perhaps you still don’t quite understand the whole guarantor thing. This post is for you. It will explain everything you need to know about the guarantor in the simplest possible terms. As a side note, there are ways around guarantors. One of them is to seek out a hard money loan from an organization like Salt Lake City-based Actium Partners.
Actium Partners has a lot more flexibility to work with certain kinds of borrowers. If a borrower’s collateral is exceptionally strong, the likelihood of that borrower needing a guarantor is pretty slim. With that said, let us move on to discussing guarantors and how they work.
A Basic Definition
Actium Partners explains that a guarantor is an individual or business entity that agrees to guarantee repayment of another individual or business’s debts. Imagine you are a small business owner in need of debt refinancing. A fellow business owner may act as your guarantor at the request of your bank. In such a case, that person would be promising to pay the loan in the event you default. Note there is a difference between a guarantor and cosigner. That difference will be discussed later in this post.
Two Types of Guarantors
The laws in most states recognize two types of guarantors. They are limited and unlimited. A bank will determine which type of guarantor it needs on a case-by-case basis.
A limited guarantor is one whose liability is limited in terms of loan percentage, loan terms, etc. For example, a limited guarantor might only be asked to guarantee 50% of the value of the loan in question. Or the guarantor may be required to guarantee the loan for a limited amount of time. At the end of that period, the borrower takes full responsibility for the loan.
An unlimited guarantor is exactly the opposite. This individual or business entity guarantees the loan until it is completely paid off. The guarantor’s liability is irrespective of loan value and terms. This is obviously the more risky position to be in, so individuals and businesses must do their due diligence before agreeing to act as an unlimited guarantor.
Guarantors Are Not Cosigners
There is some confusion between the guarantor and cosigner. For the record, cosigners are rarely utilized in commercial transactions. They are more of a retail thing. Nonetheless, cosigners are worth discussing just to make sure there is no confusion.
Guarantors and cosigners both agree to guarantee the debt of someone else. However, the legal difference between them lies in the individual interests they have in the transaction. A cosigner has an interest in an asset involved in the deal. For example, you may have two property investors who have equal interest in a particular asset. If that asset is used as collateral to obtain a loan for just one of the parties, the other party may be required to act as cosigner.
A guarantor has no interest in a shared asset. This is important for legal reasons, but also in terms of surety as well. Sometimes guarantors are required to pledge their own collateral as surety for a loan.
Hopefully you now understand the basics of guarantors and what they do. Guarantors are a normal part of traditional business lending.