Business Loans: Amortisation And Personal Guarantees
Richa owned a small printing business. A few years in, she felt the venture needed to grow. She needed to buy new equipment and expand her client base. A small marketing campaign would not hurt either. But, like all small businesses, her company was strapped for cash. So Richa decided to look into some business financing options.
Before you apply for a business loan, make sure you understand the different business loan requirements. Chief among these are amortisation and personal guarantees for business loans.
What is Amortisation?
Amortisation is the regular and consistent repayment of debt over time. You make payments in the form of equated monthly instalments (EMIs). Each EMI has two components: (1) principal and (2) interest.
How do you calculate your business loan amortisation?
To calculate your business loan amortisation, you need to know the interest rate. The business loan interest rate in India ranges from 11% to 28%. The rate you get depends on the lender. It also depends on the creditworthiness of your business.
Two other things matter here: the loan amount and the tenor you choose.
Once you have these details, key them into an amortisation calculator online. Most such calculators come free of cost.
Also Read : Advantages Of Availing A Business Loan
What is a Personal Guarantee?
Some lenders may ask for a personal guarantee. So, you have to bring a guarantor on board for your business loan. This guarantor could be a business partner or somebody else. The guarantor would sign the personal guarantee. In effect, the guarantor would agree to repay the loan if your business fails to do so.
Why is a personal guarantee essential for business loans?
Lenders like banks and non-banking financial companies (NBFCs) take calculated risks. Personal guarantees provide lenders with a buffer for this risk when lending to businesses. Launching a start-up or funding a small business is a risky endeavour. And lenders consider small business loans to be high-risk credit.
A personal guarantee by the business owner shows that the owner has a tangible stake in the business. Imagine if the business fails. The business owner would be responsible for repaying the debt.
Is there only one type of personal guarantee?
No. There are two types of personal guarantees for business loans:
- Unlimited personal guarantees
- Limited personal guarantees
What is an unlimited personal guarantee?
With an unlimited personal guarantee, the guarantor covers 100% of the outstanding loan. But the burden extends beyond this debt as well. The guarantor has to pay off all legal fees associated with the business loan.
Suppose you signed a personal guarantee for a business loan of Rs 20 lakh. Now, say the business defaults on the loan. The lender begins legal proceedings to recover the payment. In the course of this, the lender incurs legal fees of Rs 25,000. As the unlimited personal guarantor, you have to repay the outstanding debt, plus the legal fees of Rs. 25,000.
What is a limited personal guarantee?
Some businesses have more than one shareholder. This means each shareholder has a different stake in the company. In such a case, a limited personal guarantee comes into play. Suppose multiple partners in a business organisation applying for a business loan. Each partner will need to sign a limited personal guarantee. They will share the burden of repayment, usually in proportion to their stake in the business.
There are two types of limited personal guarantees –
- A several guarantee
- A joint and several guarantee
What is a several guarantee?
In a several guarantee, each shareholder is liable for a fixed percentage of the loan amount. The percentage tends to reflect the shareholder’s stake in the business.
What is a joint and several guarantee?
Here, each guarantor is personally responsible for the outstanding loan. There is a serious risk for the guarantors in such a case. Suppose one guarantor cannot pay their share of the debt. Then the lender could ask the other guarantors to cover that guarantor’s share.
What are the Guarantors?
Once you sign a personal guarantee, you must declare your personal assets to the lender. This may include your house, car, and personal bank accounts. You could pledge investments like National Savings Certificates as well. As mentioned, your will bear the debt burden if the business defaults on the loan. If you fail to repay the loan, the lender may liquidate your personal assets.
Knowing how it all worked has helped Richa with her financing needs. She brought on board a reliable guarantor to cover any financial contingencies. Getting approval for the business loan set her expansion plans in motion.