Leading your business on a path towards financial sustainability and expanding your customer base demand one hundred percent of your energy, emotions, and efforts. It’s exciting and challenging. You’re all in. A fundamental perspective in running a business is ownership: you’re responsible for its success, its financial health, and the team that drives it. As you explore different loan options to grow, commercial lenders may require you to take personal responsibility for the loan. Lenders call this the personal guarantee.
Virtually all commercial loan products from traditional lenders require a personal guarantee as well as leases and loans related to equipment financing. A certain subset of very expensive alternative lenders such as merchant cash advance (MCA) companies may not require a personal guarantee, but will charge you in interest to make up for not requiring your guarantee. For example, OnDeck – a MCA company and one of the largest alternative lenders for small businesses in the U.S. – requires a personal guarantee. Even with a personal guarantee, OnDeck’s average rates are often in excess of 50% annualized percentage rate (APR).
What is a personal guarantee?
A personal guarantee allows you – the business owner – to borrow a loan by putting your own assets – real estate, cash, savings, or any other collateral – on the line should the business be unable to pay back the loan. Ideally, you’d like your business to be able to borrow on its own without involving your individual assets. However, this is rarely an option for small business borrowers.
You also may be wondering: For how much of the loan am I personally responsible? At Dealstruck, every owner whose ownership interest is 20% or greater must be an applicant on the loan. Each of these owners must also personally guarantee the loan. If the company is wholly or significantly owned by another company, lenders like Dealstruck may require the major shareholders of the parent company to be applicants and guarantors of the loan. When there are multiple owners in a company with 20% ownership or more, each owner is jointly and severally liable for the loan, meaning that even though you are applying with three other people, you are taking personal responsibility for the full amount of the loan.
Personal guarantees can significantly affect your changes of receiving a loan offer. As banks and alternative lenders want to improve their chances of getting paid, they want to be able to collect payments no matter what happens to your business. At Dealstruck, we do not secure any personal assets of the borrower just because the loan is personally guaranteed. We do not file liens on any borrower’s home, vehicle, or any of their personal assets.
If you’re considering a personal guarantee for your loan, consider these quick tips from the Dealstruck Team:
- Know your risk tolerance – both personal and professional. Risk tolerance is best informed by the needs of your business and the loan amount and type would be the best fit.
- Ask the right questions.
- Are you willing to pay a higher interest rate to alleviate personal risk?
- Would borrowing less money be more effective for your short-term or long-term business strategy?
- Would you consider a shorter maturity date on the loan, bearing the risk of higher monthly payments?
- Demand transparency, openness, and clarity from your lender. The right and best lenders are the ones that honestly lay out the details of your loans. They go the extra mile in demonstrating patience and initiative, as they care more about your business’ success than their own.
The Basics is a Dealstruck blog series to education the small business owner on all-things lending.