Why Do I Need to Give a Personal Guarantee when Buying via my SMSF?
What is a Personal Guarantee and Why Does the Bank Require it When Borrowing Through Your SMSF?
When you borrow money through your Self-Managed Super Fund (SMSF), the bank will often ask you to provide a personal guarantee. This can be daunting, so it’s important to understand what this means and why it is required. In this blog post, we’ll discuss what a personal guarantee is and why the bank requires one when you are borrowing through your SMSF.
What is a Personal Guarantee?
A personal guarantee is an agreement between the borrower (in this case, your SMSF) and the lender (the bank). It states that if your SMSF defaults on its loan, then you as an individual guarantor will be liable for any unpaid amount up to a certain limit or percentage specified in the loan contract. The purpose of this agreement is to protect the lender from losses due to default by providing them with additional security in case of default on their loan.
Why Does the Bank Require a Personal Guarantee?
The main reason banks require a personal guarantee when borrowing via an SMSF is because an SMSF has limited assets compared to other businesses or entities that may apply for loans. As such, they need extra assurance that they will not suffer losses in case of default. A personal guarantee provides them with that assurance as it gives them legal recourse against the individual guarantor if necessary. Additionally, banks may also require a personal guarantee due to concerns about non-payment of taxes or other liabilities that might be associated with the fund's activities.
How Can I Mitigate My Risk?
If you are asked to provide a personal guarantee when borrowing through your SMSF, there are some steps you can take to mitigate your risk and protect yourself from potential financial losses; make sure you understand all terms and conditions of the loan agreement before signing anything; consult with an accountant or lawyer if necessary; carefully review all documents related to the loan; keep track of all payments made under the loan agreement; ensure that all taxes and other liabilities associated with your SMSF are paid promptly; and consider taking out insurance cover for any potential losses under the loan agreement. All these steps can help reduce your liability in case of default by providing evidence that you acted responsibly throughout the process.
If you have questions about giving a personal guarantee when borrowing via your SMSF or need assistance navigating these agreements, consult with an experienced lawyer before signing anything.