All About Business Loan Guarantor - Business Loan Blog - Tata Capital

Business Loan Guarantors

Mar 06, 2017

A loan is the best solution to fulfill your business' capital needs. Credit helps to not only finance your daily business operations but also further expand the business. These days, many banks and Non-Banking Financial Companies (NBFCs) offer funds at attractive interest rates. Moreover, loan seekers now have a plethora of loan options to choose from, given the every-increasing competition in the finance industry.

There are two types of business loans available, namely secured loans and unsecured loans. Secured loans require you to keep collateral against the loan. This collateral acts as security in case you default on payments. Unsecured loans, on the other hand, do not require any security against the loan. Such loans are approved on the basis of your creditworthiness.

About guarantors

A guarantor is a person, generally a relative or friend, who agrees to repay the loan amount in case of your inability to repay the same. In the case of partial non-payment, the guarantor is liable to repay the outstanding loan amount. Guarantors are generally required to co-sign the loan agreement in case the loan amount is high. Guarantors are also required if your business has a low credit score or no credit history to show. In such a case, the chances of getting approval on the business loan are high as the financier is assured of recovering the amount from the guarantor.

Eligibility to become a guarantor

Various lenders have their own set of eligibility criteria for guarantors. However, the basic set of criteria remains the same.

  1. Guarantors should be at least 18 years of age
  2. They should understand the implications of becoming a guarantor
  3. Guarantors should be financially stable that is they must not be bankrupt

Risks involved in becoming a guarantor

It is essential that guarantors are aware of the fact that they may be required to sell their assets to cover the outstanding loan amount in case of your default. Further, in the case of your non-payment, the guarantor's credit score may be impacted negatively. This is due to the fact that lenders assume no difference between the borrower and guarantor in case of a default. However, being a guarantor does not create a negative impact unless the borrower defaults on payments.

Loans with guarantors, therefore, help you gain easy access to finance. Lenders offer a competitive rate of interest, as they are assured that they will be able to recoup their losses in case of a default. Besides, lenders also provide other benefits like flexible repayment terms and the option of extending the loan tenure as per your requirement. Additionally, you may also borrow a higher amount if your loan is secured with a guarantor.

Ultimately, a loan with a guarantor is extremely helpful in case your business has a poor credit score. You may also seek a guarantor to secure your loan in case you do not have any assets to keep against the loan. Such loans, therefore, aid in meeting your business' capital needs without any financial worries.