Why Do I Need A Personal Guarantee?

Why Do I Need A Personal Guarantee?

It is standard procedure for an underwriting bank to ask for a personal guarantee. For many business owners it can seem like a stressful or risky commitment. When businesses apply for credit card processing they are often surprised by the amount of information required and and that it takes time for approval.

So Why does it take so much time and paperwork?

Businesses often aren’t aware that accepting credit cards requires an extension of credit to the business. Here is why:

When a customer purchases an item with a credit card they have up to 180 days to report a transaction as fraudulent. This is called a chargeback. Chargebacks help to protect consumers against stolen credit card information, as well as against unscrupulous businesses overcharging their customers.

One classic example of a chargeback is a customer who checks out of a hotel, only to find a bill including pay-per-view and minibar charges that they didn’t incur. After discussing the issue with the proprietor, the customer maintains that they didn’t order 40 pay-per-view movies in one night. Despite this, the hotel charges the credit card holder the full amount. The customer then has the option to call their card-issuing bank and issue a chargeback on the grounds that they didn’t receive what they paid for.

Kubera payments, and our banking partners, provide 24hr daily deposits into the bank accounts of the businesses we work with. As the chargeback from the above scenario could come months after the event, the money from the original transaction will have long since been deposited, and possibly spent. Credit is extended to businesses that accept credit cards to cover this 180 day chargeback risk.

Established businesses with solid financials in low-risk industries normally have little trouble establishing credit card processing. New businesses, especially those in mid-risk industries, often don’t have the processing history and established financials to qualify for credit on their own merit and will require a personal guarantee.

Requiring a personal guarantee is not passing judgement over a particular business or business model. It is designed to allow new businesses, or businesses without solid financial history, the ability to process credit card payments with the backing of the principles for the business.

Further questions about chargebacks or the personal guarantee? Leave a comment or call to speak with an expert at Kubera.