Sweet Promises

When do you have to personally guarantee a loan?
Magazine Contributor
2 min read

This story appears in the January 2001 issue of . Subscribe »

Q: I want to borrow for equipment and improvements to my gourmet chocolate shop. The 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 -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.


More from Entrepreneur

We created the SYOB course to help you get started on your entrepreneurial journey. You can now sign up for just $99, plus receive a 7-day free trial. Just use promo code SYOB99 to claim your offer.
Jumpstart Your Business. Entrepreneur Insider is your all-access pass to the skills, experts, and network you need to get your business off the ground—or take it to the next level.
Create your business plan in half the time with twice the impact using Entrepreneur's BIZ PLANNING PLUS powered by LivePlan. Try risk free for 60 days.

Latest on Entrepreneur