Finance

The Basics of Private Loan Guarantees

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What it is: You find an angel investor or investors -- in other words, wealthy people with credit -- to guarantee a bank loan for your early stage business.

How it works: It is hard to tell how common this practice is. Citing research from the University of New Hampshire’s Center for Venture Research, the crowdfunding platform EquityNet reports that nine out of 10 angel investors provide additional support through loans and loan guarantees.

Basically, it is an alternative to bring up when a prospective investor is intrigued by your young company’s potential to grow, but still hesitant to invest too much cash in the business right away. Through a loan guarantee, they can help out more without having to actually turn over cash.

Some angel investors provide lending through a convertible note, which is a loan that can be converted to equity in the business down the road.

Upside: You get more money without having to give up more ownership in the business -- at least not right away. The deal might also be easier to negotiate, because the investor is not forking over money.

Downside: Because of its nature, the loan's terms will likely be short. That means there's a limited amount of time to make money in order to pay off the loan. There will also be interest and fees to pay to the bank.

You -- the entrepreneur -- will also have more skin in the game, including your own personal guarantee.

Related: 4 Tips for Negotiating a Personal Guarantee

How to get it: A guarantee from a wealthy person should make securing a bank loan as easy as shooting fish in a barrel. The issue is finding the angel or angels willing to provide the guarantee.

The Overland, Kan.-based Angel Capital Association has an online listing of angel groups that are members in good standing, as well as organizations affiliated with the ACA. 

Other websites to check out include AngelList and MicroVentures.

Related: Getting Started With Angel Investing

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