Borrowing money is one option for entrepreneurs looking to fund their business.
As part of the process of borrowing money, many entrepreneurs are finding that lending and financial institutions are requiring them to personally guarantee the payment of the loan. A personal guarantee requires you to personally pay the loan if and when your business is unable to make the payments, even if your business is incorporated.
But should you sign a personal guarantee for your business loans? Is there an alternative?
Signing Personal Guarantee for Your Business Loan
Most entrepreneurs start out firmly believing that their new business will succeed, so they don’t think twice about signing a personal guarantee for their business loans. They accept it as part of the financing process to raise capital for the business.
The main downside of signing a personal guarantee for your business loan is that you stand to lose major personal assets if your business falls under. You risk losing your house, car, land, or all your savings.
When you sign a personal guarantee to pay the loan of your business, oftentimes you may be personally liable for 100 percent of the amount being guaranteed — even if you own only 20% of the business.
Even if the business has been dissolved, creditors can still run after you if your business fails to make the loan payments.
Borrowing without Personal Guarantee
How can you borrow money without you — personally — having to guarantee payment? How can you find lenders that will allow you not to personally pay the loan if your business can’t pay?
It is not going to be easy.
If your business is new or just incorporated, without a business credit history, it is not likely that traditional lenders will give you business credit without personal guarantee. Most banks and even the Small Business Administration will not give you a business loan without a personal guarantee.
However, here are some approaches that you can take:
1. Build a business credit history.
The first step is to set up the proper business structure and take basic steps to ensure your business appears “real” and stable to the business credit bureaus. This includes registering the business with the state where it will do its business, getting all requisite licenses and permits, getting its tax ID number, among other.
Once the business is step up, create an account with Dun and Bradstreet (also called D&B), which is the largest keepers of business credit history. Establish a basic D&B business credit file for your company.
Then open an account for your business from companies that will report your credit history to the major business credit reporting agencies such as Dunn & Bradstreet and Experian. Some businesses that report your credit history to business credit reporting agencies include:
- Fed Ex
- Home Depot
- 4 Imprint (30 day net)
- Tech Depot (by Office Depot)
The whole process takes time, but this is something that you must do right from the get-go with the formation of your business. For more information on building business credit, read the article “Building Business Credit”
2. Borrow from suppliers and avail of supplier discounts.
Your suppliers are actually your best bet for business credit of your newly formed business without a personal guarantee. They are much easier to deal with than banks, and they are often eager to establish new customers.
It is important to make the effort to build up a good relationship with your suppliers to open up the chance of being offered credit and even discounts. Note though that suppliers will not offer you credit the first time you buy from them. They need to get to know you and your business; how your business will work for them and how solid it is, and that you are a reliable partner and good payer.
Trade with your supplier for a few months on a ‘payment with order’ basis, to help build your relationship and allow the supplier to see how much money you are likely to be spending. When they become more comfortable with you, then you can talk to them about extending you 30, 60, 90 or even longer to pay your bills. This will allow you to grow your business on your suppliers’ credit. Plus, your suppliers can help you build your business credit.
3. Deal with smaller, community banks.
Many lenders – especially big banks — adopt a “take it or leave it approach” if the borrower refuses to provide personal guarantees for the repayment of the business loan.
However, there may be some room for negotiation with smaller, community banks. Talk with the smaller banks and assess their dependence on personal guarantee. More importantly, examine whether they are willing to overlook personal guarantees with the collateral you can bring in for the loan as well as the creditworthiness of the business.