From the January 2001 issue of Startups

Q: I want to borrow for equipment and improvements to my gourmet chocolate shop. The business is incorporated, and I own half. Must I personally guarantee the loan?

A: Like calories, guarantees are hard to avoid. Lenders want guarantees for collateral and for psychological reasons. With a personal guarantee, the lender can go after your personal and business assets if the loan sours. A personal guarantee keeps the borrower focused on the business, making him less likely to quit and more cooperative with the lender.

Broad guarantees are part of all loans. For instance, each owner of at least 20 percent of a business must personally guarantee 100 percent of an SBA-insured loan. Limit your guarantee to the present loan-don't cover future loans. And try not to guarantee the entire amount of the loan. Instead, guarantee only any deficiency balance after the bank has made its recovery. Offer specific personal assets for your guarantee with no liability beyond their value.

If things go bad, the bank will not pursue payment equally; it will go after the deepest pocket to collect 100 percent. You could end up suing your partner to collect his share. Try to limit your guarantee to 75 per-cent; the bank will still have 150 percent loan coverage.


George M. Dawson is author of Borrowing to Build Your Business: Getting Your Banker to Say "Yes" (Upstart Publishing). Send questions to bsumag@entrepreneur.com.