A personal guarantee is a requirement for almost every loan I do. 20 of our 22 existing loans require personal guarantees. The only two borrowers who don’t guarantee are non-profit companies where no single person is in charge. I’ve also sometimes made loans without a personal guarantee when a borrower is owned by an institutional equity fund.
Why is a personal guarantee so important? First, it signals to me that the owner is so confident in the prospects of the business that they are willing to personally guarantee the loan’s success. I don’t hesitate to sign a personal guarantee for the lines of credit used by my lending companies because banks have never lost a dime dealing with my companies and never will. I signal I’m confident in the quality of the bank loan by signing a guarantee. If you think the financial risk of a business deal is so high that you don’t want to guarantee the loan you shouldn’t do the deal.
Second, a personal guarantee insures that the borrower will cooperate if things don’t go as planned. A business owner without a personal guarantee will fight tooth and nail to keep from selling a business which is performing poorly in hopes that one day the business may turn around. A business owner with a guarantee will cooperate to help a lender maximize the value of the collateral because that’s the best way to limit personal liability.
Many borrowers wait until the end of the process to say that they’ll never guarantee. They think a personal guarantee is negotiable. It’s an unfortunate waste of their time and my time.
