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Loan Woes

Feel like you're signing your life away?

This story appears in the April 2007 issue of Entrepreneur. Subscribe »

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 , 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 ) 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, 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 's Ellenoff Grossman & Schole LLP.

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