Whether or not your name is on the shingle, your business becomes your identity and your reputation is intertwined with the fortunes or failures of your business. As the owner, the visionary and the public face of your business, you are your brand and every measure should be taken to protect it. That’s why, when it comes to business financing, you had better take those personal guarantees seriously.
What if it is the Only Way to Get Financing?
Although most business planners and attorneys would advise against it, signing a personal guarantee for a business loan may be the only way you can obtain financing for your business. Loans backed by the Small Business Administration (SBA) require that a business owner, who has at least a 20% stake in the company, must personally guarantee the loan. And, most lenders require a personal guarantee for uncollateralized small business loans.
If your business is going well and the forecast for profits is bright, signing a personal guarantee may not be much of a concern to you. However, it is important to keep in mind what that personal guarantee really means to you, your business and your brand. And what the personal financial consequences are if something goes wrong.
What is the Big Deal?
Essentially, when you agree to personally guarantee a business loan you, as an individual, are cosigning the loan with your business which means your personal assets are equal targets alongside your business assets. More than that, a personal guarantee is your decree to the lender that you willingly stake your integrity and reputation behind your promise to repay.
Lenders don’t take that pledge lightly, so neither should you. In the event of default, depending on the loan’s terms, they could possibly force the liquidation of your business and/or they can take your personal assets, either of which would be devastating. This would also wreak havoc with your personal credit report and, potentially damage your most valuable asset: your name and your reputation. Remember, you are your brand. If you are able to keep that intact then you can rebuild using the same formula that propelled you to success the first time. But, if your brand is tarnished or your personal credit score trashed, the rebuilding could be much more difficult.
What Can You Do?
For a business owner looking for financing, a personal guarantee should be the course of last resort. When one is required, it is because the lender is questioning the viability of the business, or the adequacy of the collateral for the loan, or the business’ prospects for generating revenue sufficient to repay the loan. The business owner should consider that a red flag and make his own honest assessment as to whether the business is truly in a position to weather an economic storm or a sudden downturn in business activity. Bankers and lenders are very stingy with credit these days, so there may not be any problem other than the lender’s desire to insure repayment under all circumstances. As a business owner, you are in the best position to know how much of a financial risk you and your business are taking in any given situation.
What Steps Can You Take?
A well-documented loan request that includes a realistic business plan, accurate financial statements, documentation of previous business profitability and a detailed cash-flow forecast evidencing the ability to make repayment is the best way to approach lenders. You may still have to guarantee the loan, but you will have done enough due diligence to have a reasonable degree of certainty that your company will be able to pay is back. If it isn’t a strong package, then the prudent course may be to wait and work on improving your cash flow position, adding some key contracts and building your brand reputation before borrowing.
In some situations, you might be able work out an agreement with the lender to lift your personal guarantee after certain targets are met or possibly consider refinancing later after a portion of the debt is repaid in order to eliminate the personal guarantee.
Whatever the case, never sign a loan document unless you understand all the terms involved. And, preferably, you should have an attorney review it with you.