Archive for September, 2012

Small Business Loans and Personal Guarantees

September 10, 2012

In today’s world, most small businesses can’t get a loan from a reputable lending institution without a personal guarantee by someone.

Yet for many years, experts and advisors have argued, convincingly, giving a personal guarantee is a possible road to a small business leader’s personal fiscal disaster.

A personal guarantee (PG) is a note signed by a loan guarantor – business owner, partner, investor or family member – that pledges personal assets as collateral in addition to the business assets. In the event of a loan default, this signed note gives the lender the right to pursue personal assets like homes, bank accounts and valuables ― sometimes even before the business assets have been liquidated.

But with the company’s future often at stake, what can small business leaders do to mitigate a PG?

Here are some things to do before giving a PG:

Know what you are signing – The terms of a PG can vary widely and need to be specifically addressed BEFORE singing on the bottom line. After the papers are signed, there is little that can be done.

Know who you are signing with – When there are multiple partners involved, they often sign a “joint and several” PG agreement. Lenders go after the partner with the most liquid assets first.

Know what level of risk is involved – Determine the maximum amount to be put at risk and don’t budge from this number.

Always negotiate the terms – The lender makes money by lending so it has a reason to close the deal.

Don’t undervalue the company or the small business leader – Have a good reason for borrowing, with checkpoints along the way. The company is a valuable asset and should be pictured in the best possible light.

Draw down the loan in stages – Be smart and take money as it is needed and not all at one time if possible.

Make the company’s assets the first line for the loan – Try to get the lender to agree company assets will be the first to be attached and the PG comes in afterwards.

Negotiate to the last minute – nothing is final until the papers are signed so try to get the best possible deal as long as possible.

Consider taking out insurance against default – There are companies such as Asterisk Financial who specialize in providing policies to mitigate personal loss should something happen.

PGs are liens against personal assets and should be considered only after all other avenues are exhausted.  They pierce the corporate veil and put a very personal risk into play.

It’s like the pig and chicken in a ham and egg omelet.  The chicken is involved and the pig is committed.

While it may be said a small business leader is involved with a personal guarantee he or she is committed.