What is a guarantor?
A guarantor is essentially a co-signer on an application. In this case, the application refers to a business loan – one that will be used for real estate investing. The guarantor is essentially guaranteeing that the loan conditions will be upheld, if not by the primary loan applicant, then by them – which is why they are required to sign the contracts. However, this means the guarantor will be on the hook if anything goes wrong, or money is required to service the loan.
When might you need a guarantor for a business loan?
In terms of when you may need a co-signer, consider the factors we discussed in our article about better positioning yourself for a loan application. Here’s a quick refresher of the 6 C’s of credit that lenders take into consideration.
Character: refers to your personal character
Capacity: refers to your ability to service the loan and make payment
Capital: refers to how much of your own money is involved
Collateral: refers to assets that you can use to guarantee the loan
Conditions: refers to general market and economic conditions
Confidence: refers to the lender’s confidence in your character and abilities
If you are lacking in any of these areas, or if the lender thinks you are, then it may be beneficial to find a guarantor. Typically, finding a guarantor stems from financial issues. This could be the result of not having enough cash required for a down payment, lacking the capacity to service the loan or lacking the necessary collateral.
What to look for in a guarantor.
While it can be tempting to turn to friends and family with good credit standing, we’re going to discuss some better ways to find a guarantor for your real estate business loan. An even better idea is to find someone who would complement your initiative – in this case, real estate investing. If this individual has both good credit standing and relevant expertise, it can be even better for your loan application. Not only will they provide the financial backing, but the lender may feel more confident if the guarantor has relevant expertise in the area of business you are pursuing. All of this will help to foster greater confidence in the eyes of the lender. And of course, be sure to have a clear contract with your guarantor.
Benefits of having a guarantor.
As we’ve briefly mentioned, there are two primary benefits of having a guarantor on your side. These include:
Financial security: So long as it is discussed with your guarantor, you will likely be able to lean on them for financial support if necessary. This could require having them make an interest payment or infuse more capital into the project.
Relevant expertise: Secondly, you can rely on your guarantor’s relevant expertise. This way, your guarantor can provide guidance in times of uncertainty and provide tips for improvement. Ultimately, it gives you a chance to learn from someone who has already gone through the process.
Downsides of having a guarantor
Just because a guarantor will help you to secure a loan doesn’t mean it will always be worthwhile. Remember, there’s risk involved for them too. We know the old saying that says you’ve got to take some risk to experience a reward. Hence, you will need to work out a deal with your guarantor and essentially, compensate them. This means that it will be cutting away at your profits.
The bottom line is that you must determine whether a guarantor is right for you. Figure out whether it is the best option if you have no way of obtaining a loan on your own. Either way, there's never a shortage of money looking to back a great deal. The key is simply knowing where to find it. By attending a Elite Legacy Education event, you will be introduced to a variety of funding sources and our Elite Legacy Education speakers will demonstrate which sources fit different types of real estate investments.
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Legacy Education Alliance, Inc. is a leading provider of educational training seminars, conferences and services. Rich Dad Education offers real estate & stock training based on Robert Kiyosaki's book Rich Dad Poor Dad.