July 2017 – Business As We See It
How to Limit Risk When Personally Guaranteeing a Business Loan
It’s not an uncommon scenario: Your business needs money, but your financial institution requires a personal guarantee before it will lend any. This is especially likely if you’re seeking a Small Business Administration loan, because the SBA requires a personal guarantee from any owner of 20% or more of a business as well as from others holding key management positions.
Signing a personal guarantee isn’t a step to take lightly. It allows the lender to go after your personal assets — including investments and even your home (though some states limit lenders’ ability to go after a borrower’s residence) — if the business is unable to meet the terms of the loan.
By requiring personal guarantees, lenders hope to limit the risk their borrowers will default. After all, if their homes and bank accounts are on the line, business owners presumably will do all they can — and then some — to ensure their ventures succeed. This commitment is especially important for a new business, because a bank has limited means for evaluating its performance and likelihood of success.
Although it can be difficult to entirely eliminate the need for a personal guarantee, you may be able to limit its scope by taking the following steps:
- Ask to split the amount guaranteed across all owners or executives in the business, even if it’s unlikely that the request will be granted. For instance, if you’re one of 10 co-owners in the business, and each has 10% ownership, ask that each owner be responsible for no more than 10% of the amount borrowed.
- Negotiate a guarantee that’s for some percentage of the loan amount rather than the entire amount.
- Request that certain personal assets, such as your home, be outside the reach of the guarantee, if the laws in your state don’t automatically provide for this.
- Ask that the amount guaranteed drop as you make timely repayments.
- Request a reduction in the amount guaranteed as business grows and the company becomes more stable.
- Check whether the guarantee can be reduced in return for accepting a higher interest rate.
- Ask to be released from the guarantee if you sell your stake in the business.
Finally, you can try running the numbers again to determine whether you can borrow a lower amount and still have enough to operate, which also should reduce the amount of the guarantee.
While many lenders require a personal guarantee when making some business loans, it’s usually possible to negotiate at least some of the terms. Your legal and accounting professionals can help you understand the provisions of a personal guarantee and provide ideas for negotiating one that fits your needs.
© 2017
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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