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Avoid Personal Guarantees in Your Business Name

Mar 15, 2008
A Personal Guarantee is a promise by you and your business partners that you will repay the loan. If your business goes under or you can't send in your payment, this has no bearing on the repayment of the loan to the bank. You and your business personally guaranteed the loan would be prepaid. If you have to sell off your business and your personal assets due to a judgment then so be it. You personally guaranteed it. If this means non business items such as family heirlooms are sold at 10% of their value are sold to pay the bank, they don't care. They want their money and they'll do whatever they legally need to do to get it.

As bad as it sounds, it can get even worse in some cases. If the loan was personally guaranteed by all business partners, you could be liable for the entire loan. That means that even if you're just a 10% owner in the business, you could be liable for 100% of the loan. What if you're a minor partner in several businesses? Do you want to have to personally guarantee a loan that defaults due to someone else's mistake?

How can we avoid this? Here's couple of solutions.

First, you need to build up your business credit. Good enough business credit will give you a bit of leverage over the bank. There are companies that will guide you to getting better business credit. Once you have good credit, if the bank insists on the need to personally guarantee a loan just state that your credit score is high enough and should be sufficient to cover the loan. Even if you can't void this requirement a good negotiator (or company acting on your behalf) can reduce the personal requirement to just 25% of the loan. Hey it's better than having to repay the entire amount especially if you're just a 10% percent partner.

But the best solution is to avoid having to personally guarantee all together. Ask yourself if you really need the entire loan amount. Can you borrow 75% of the original amount? That may be just what you need to avoid the guarantee. Will the bank agree to a shorter payment plan? What if you're able to repay the bank back within three years as opposed to four? Will they avoid the requirement this way? They just might!

Just remember that banks are in the business of lending money. They need to lend money if they're to be profitable. If the terms aren't acceptable to you, just politely walk away. Don't burn your bridges but very politely state that the terms won't work for you and leave the meeting. You may find a message for you in a few days asking you to discuss the loan again. You never know, it's happened before!

Remember, with every problem there's a solution if you look hard enough. If what's presented to you isn't working, then dig until you find something that works! Sometimes the solution is just another effort away.
About the Author
Scott Letourneau is the CEO of NCP, Inc. and is offering free business credit training to interested business owners across the country. For a webinar 90 minute class where Scott corners a national bank offical and askes the "Hard Questions" visit http://nvinc.com/business-credit.htm
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