Feel like you're signing your life away?
Question: I'm in the process of applying for a loan to start my business, and I just found out the bank is requiring me to sign a personal guarantee. I have excellent credit, and I have never missed a payment in my life, but I'm a little uneasy about personally guaranteeing the debts of a startup business. Any advice?
Answer: Put yourself in your banker's shoes. Because startup businesses are inherently risky, banks need a way to make sure their loans will be repaid--whether or not your business succeeds. Although lenders typically look for the five Cs (character, credit, collateral, capital and confidence in your business plan) when making a loan, banks also require personal guarantees from the company's owner to protect them from losses in the event that the business defaults. Also, your personal assets (house, cash, stocks, bonds and mutual funds) are easier for banks to get their hands on than the assets of a business, which may consist of a couple of used computers and phones. When my partner and I were building our internet marketing company, NetCreations, Citibank required us to provide personal guarantees for both our credit line and our equipment lease--loans that totaled $2 million. It wasn't until our company went public that the bank let us off the hook. That's why, until you feel comfortable personally guaranteeing a bank loan, you should consider borrowing smaller amounts from friends and relatives, who are generally more patient than commercial lenders. To sweeten the deal, throw in a "warrant kicker" to give them a share of the upside if your company turns out to be a big winner, advises Lawrence Rosenbloom, a corporate and securities lawyer at New York City's Ellenoff Grossman & Schole LLP.
Continue reading this article - and everything on Entrepreneur!
We make some of our best content available to Entrepreneur subscribers only. Become a subscriber for just $5 to get an ad-free experience, exclusive access to premium content like this, and unlock special discounts.
Entrepreneur Editors' Picks
Kale Was a Garnish Before This Creative Genius Made It Famous. Here's How She Did It — and What She's Planning Next.
Telling Your Brand Story Is Crucial. 4 Steps to Ensure That It Resonates.
This Baker Was Told Not to Speak Spanish With Colleagues, So She Started Her Own Cake Company That Values Employees Just as Much as Customers
Improving Yourself Takes 9.6 Minutes of Work Each Day
Meet the Women Behind Some of McDonald's Most Iconic (and Essential) Ingredients — and How They're Setting New Standards
Remote Work Shouldn't Be Up for Debate
Employees Are Over Foosball Tables and Free Snacks. Your Company Culture Needs This Instead.