Friday/December/18 13:02
by Derek G. Rowley © 2009, All Rights Reserved
As the credit market struggles to rebound from it’s year-long collapse, more small business owners are being asked to provide personal guarantees on business loans and notes. The personal guarantee often becomes the critical do-or-die tipping point that can make all the difference in getting the loan or not.
For lenders, getting the personal guarantee gives an extra level of protection and assurance that the loan will be paid. For the business owner, it is an emotional and psychological test that challenges their commitment and belief in the business model. It takes a lot of courage for a business owner to put it all on the line for the business.
The practice of asking for a personal guarantee on small business lending is so common that many accept is as standard practice. For example, SBA loans requires every 20% or more owner to provide one in order to close the deal. But, the problem that this creates is obvious. The personal guarantee operates outside the corporate veil. If the business fails, the owners are pledging to pay back the loan anyway - even if the company has been dissolved. In practice, this means that the business owner is risking not only his/her livelihood in the form of the business, but also his/her lifestyle, including home, savings, vehicles, properties and every other asset of the business owner.
If you need the loan, what are your alternatives? Well, you actually do have a few. You could:
- put up enough collateral to secure the loan without a personal guarantee;
- negotiate to pay a higher interest rate, or additional points on the loan in exchange for the lender taking a greater risk without a personal guarantee;
- pass the buck to somebody else, such as a business partner;
- negotiate to guarantee only a portion of the loan, instead of the total balance;
- negotiate to guarantee the loan only for a limited period of time;
- negotiate to drop the guarantee when the business meets certain cash-flow levels;
- offer the guarantee only under circumstances involving gross negligence or fraud;
- make sure your spouse does not sign the personal guarantee, and execute an asset protection strategy to focuses on building the separate property of the spouse.