Personal Guarantee a Business Loan

[Trud09]

Hi There, I wanted to get your guys thought on personally guaranteeing a business loan. I have good credit score etc and some decent assets. Do you always, sometimes, or never risk them for your business? I understand there are personal preferences involved in the answer.

Thank you for your reply.

 

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[GlobalWealth]

Do what you need to do for your business but protect your assets to insulate them from financial risk.

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[Trud09]

Do what you need to do for your business but protect your assets to insulate them from financial risk.

Sent from my SM-G900FD using Tapatalk

So are you saying it is a bad idea to personally guarantee? I am trying to filter out ideas and am wondering if having to personally guarantee should remove some options from my list.

 

[GuestUser450]

Hard to say without knowing the deal but NO. That's like borrowing a new pair of running shoes and then tying your feet together.

A business is a vehicle to drive you forward not into a wall. If you start anything on a loan, the clock is ticking before you make your first sale. There's just too many better alternatives to get started.

Go low or go high, don't mess with the middle. Bootstrap or raise VC. If you're buying, find a creative seller-financed deal.

 

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[Trud09]

Hard to say without knowing the deal but NO. That's like borrowing a new pair of running shoes and then tying your feet together.

A business is a vehicle to drive you forward not into a wall. If you start anything on a loan, the clock is ticking before you make your first sale. There's just too many better alternatives to get started.

Go low or go high, don't mess with the middle. Bootstrap or raise VC. If you're buying, find a creative seller-financed deal.

I guess I should add more details:

Debt used to purchase an income producing asset, such as an existing business with a personal guarantee. Initial running of the numbers show the asset should cover the debt 3 times over.

It is obviously hard to say what the worst thing that can happen is though. I guess that is why I am asking the question in the first place.

 

[GuestUser450]

I guess I should add more details:

Debt used to purchase an income producing asset, such as an existing business with a personal guarantee. Initial running of the numbers show the asset should cover the debt 3 times over.

It is obviously hard to say what the worst thing that can happen is though. I guess that is why I am asking the question in the first place.

The worst is that you'd be on the hook for all of it which would kneecap your chances of raising money in the future.

The quick and dirty answer is: it depends on the scale. If it's a gas station, debt is better than equity because it's cheaper financing (7.5% interest vs an equity partner who expects big returns annually) and you retain ownership. Assuming you pay back the loan in a couple of years you'll have a 100% stake in a much more valuable business at that time. So, in that case, cash with debt is infinitely better than no cash at all.

However - banks drain your cash and make it harder to succeed all while putting you, your family and your collateral at risk for what is usually a very conservative loan; things that don't happen with bootstrapping or equity financing.

 

[GlobalWealth]

So are you saying it is a bad idea to personally guarantee? I am trying to filter out ideas and am wondering if having to personally guarantee should remove some options from my list.

I am saying do whatever it takes. If you have a great opportunity that requires borrowing money with a personal guarantee, go for it.

Be opportunistic.

Of course if you can make it work without a personal guarantee that is always better.

But if you can get a 15 year loan at 5% with a personal guarantee or a 5 year loan at 18% without a personal guarantee (assuming the deal is lucrative) then sign on the dotted line.

The lower interest payments will throw off a lot more cash.

Personally there is little I despise more than personally guaranteeing a loan....except losing a great deal. I hate that more.

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[Raoul Duke]

Both @TeveTorbes & @GlobalWealth have hit on key points. Seth godin has some good points as well.

http://sethgodin.typepad.com/seths_blog/2016/08/struggle-raise-money.html
http://sethgodin.typepad.com/seths_blog/2012/06/before-you-raise-money-assets-and-expenses.html

 

[SteveO]

Cannot answer this question quickly. As has been pointed out, there are variables.

I usually sign the guarantee. But most businesses that I buy are struggling.

The places that don't require recourse do a lot of due diligence. This makes for high costs. As a result, there are minimum loan sizes. Expect that the loan amount will need to be greater than a few million.

 

[Vigilante]

I watched a successful business go through a death spiral, and the owner had a personal guarantee attached to it. He didn't go bankrupt personally, but ended up paying back the creditor from his personal funds monthly for seemingly forever. The creditor could have swooped in on default of the payment arrangement and taken most of his personal possessions. Taught me a great lesson as an observer on what level of business risk is acceptable.

 

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[458]

In the beginning you have little choice because you don't have much of a track record to get them to waive the guarantee. Once you become more seasoned and can prove it, you can usually obtain loans without any personal guarantee.

 

[AgainstAllOdds]

Coming from a mentor of mine:

"Never personally guarantee a loan. I had to go to twenty banks before finding one that would do it without one."

 

[SteveO]

Once you become more seasoned and can prove it, you can usually obtain loans without any personal guarantee.

There are places that will do that if the assets are verified and income is proven. Otherwise, security will need to be provided.

 

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[Trud09]

Great information. Thank you all for your input, it is appreciated.

 

[ZMan26]

Hi There, I wanted to get your guys thought on personally guaranteeing a business loan. I have good credit score etc and some decent assets. Do you always, sometimes, or never risk them for your business? I understand there are personal preferences involved in the answer.

Thank you for your reply.

Im going to make a similar move.

If you know that this is it, go all in.

Make it a calculated risk, know the market, know the product, and if you're 100% sure, go all in bro.