Sweet Promises
When do you have to personally guarantee a loan?
By George M. Dawson
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.
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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.