Using a business loan guarantor helps small businesses qualify for finances without the need for a deposit. They can be used by existing businesses with unfavourable credit, and by those looking to buy or open a business. Guarantors are also used to secure debtor finance like large overdraft facilities, for example. Learn more about this role, as well as who can be a guarantor for your company.
The answer to “what is a guarantor?” has a couple different answers depending on the context.
In business, a guarantor is typically an individual or organisation that agrees to pay the debts of a borrower should that borrower be unable to pay themselves, acting as collateral for loans. While usually a third-party, there are occasions where an individual can be their own guarantor, pledging their personal assets as collateral. For instance, if you’re looking to buy a business, you can use your own equity in a property to secure a loan.
The guarantor does not have any ownership over assets purchased by the borrower – which separates guarantors from co-signers. A guarantor requirement might also be that they can verify your identity – typically for processes like job applications.
Residential guarantors are used for home loans and by letting agencies as a surety for rent payments. Oftentimes, tenants with income below a certain threshold or first-time renters will need to provide a residential guarantor in order to rent at a certain price. Residential guarantors generally need to be a family member, unlike commercial guarantors.
Who can be a guarantor?
There are some criteria for being a guarantor. A guarantor must be over the age of 18, and must live in the same country that the loan is taking place. Guarantor requirements also include having sufficient income to pay the loan payments should the borrower be unable to cover them, and generally a guarantor will need to show a favourable credit history.
In business, your guarantor can be family, a friend, a business partner or otherwise. It’s easier to use somebody you have a strong relationship with as a guarantor as there is a certain degree of trust involved in pledging their assets as a failsafe. Ideally, your guarantor will have a vested interest in the success of your business and particularly in the loan you’re taking out.
When you approach someone requesting that they be your guarantor, you should provide them with a clear business plan that forecasts your cash flow and profits. Write up a detailed guarantor agreement and make it clear that they’ll only be held financially liable should things go awry.
What assets are pledged by guarantors?
Guarantor requirements mean they must pledge their assets as security for the loan amount. This doesn’t have to be cash, and oftentimes with home loan guarantors, property is used to secure a loan. A guarantor can offer commercial property like offices, shop fronts and factories, or residential property. Up to 80% of the property value for a residential property owned by the guarantor can be borrowed for a loan, while up to 70% of the property value can be borrowed when using residential property as security.
Limited vs. unlimited guarantors
A guarantor can be limited or unlimited in terms of timelines and finances. A limited guarantor may only need to guarantee the loan for a set period of time, and might only be responsible for securing a portion of the loan – a penal sum. On the other hand, unlimited guarantors are liable for the full amount, across the entire duration of the loan contract.
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