Many of the CEOs I’ve worked with through the years stop cold at the word “personal guarantee” or feel they should just suck it up and sign. However, not all personal guarantees are created equal. Inability to repay scenarios are where you will find the differences between lenders and loans. It’s also where personally, I think I’d find myself wanting to work with a personal banker vs. an online source I’ve never met.
I like this primer from NerdWallet on the vocabulary surrounding this topic: What is Collateral? A lien? Business Lingo to Know. Because every lender I know requires personal guarantees, including the newer online sources and most credit cards, I think it’s more important to focus on what happens in the event that you can’t repay the loan.
It is the lender’s business to deal in lending risk and collateral value and they should be comfortable discussing the topic. There’s no sense in dancing around the issue. I’d recommend asking your lenders the following questions directly about personal guarantees when considering a loan:
- If the company can repay the debt from equipment or receivables, does the bank have any right to go after my personal assets?
- Does my credit card have a personal guarantee on it?
- If for some unforeseen reason the business is unable to repay the loan, in what order (personal assets vs. business assets) would you attempt to collect on the debt?
- Are you going to file a lien on specific assets or a blanket lien on all of the assets of the company?
- How are equipment and receivables valued in a liquidation?
- How likely is the bank to work out a repayment plan vs. a liquidation of assets scenario?
- If you are accepting specific collateral (i.e. equipment), am I still able to get another loan using other collateral like receivables down the road?
All is not doomsday! You may be considering a $100,000 line of credit that requires a personal guarantee, but you are more than comfortable that the business can repay the debt from it’s own assets in the event of a default. I help business owners assess operational issues and risk every day. However, at the end of the day, YOU the owner should be comfortable with what you are agreeing to and the lender you are working with. It’s worth taking your time to assess the risk by analyzing the loan structure with eyes wide open.