If you're uncomfortable - or unable - to guarantee 100 percent of your small business loan, you might want to consider breaking up the resonsibility among multiple parties, including your business partners, your investors, and even your spouse.
Dig Deeper: More Ideas on Raising Start-Up Capital
Making a Small Business Guarantee: Who Else Should Be Involved?
Following the lead of the Small Business Administration's standards, it's generally fair to say that any individual with a 20 percent or greater stake in a small business should be part of the loan-gurantee process. Your active business partners should definitely have skin in the game. Investors and other backers might also be willing to provide a guarantee, and banks are not only amenable to that idea, but seem to prefer multiple guarantors. Minimizing your risk by spreading it among multiple parties can be a great option, experts say.
Your lender may also ask your spouse to sign the personal guarantee. If your spouse has a heavy hand in your business, a joint guarantee is worth considering. Make sure your spouse is also highly educated about the risks involved in signing on as a personal guarantor, including future losses and immediate credit ramifications. You should definitely discuss this step with a financial advisor and a lawyer, because intertwining your business's finances with your personal net worth can cause serious difficulty in the event of a divorce or separation.
Dig Deeper: Risks of Tapping Family for Financial Help
Making a Small Business Guarantee: Three Things to Watch Out For
• Take into account other responsibilities your bank might tie to the guarantee should the loan default. These can include interest, legal fees and other miscellaneous costs. Take this amount into consideration in addition to the original guarantee amount before signing.
• Carefully read and examine the bank's actual guarantee agreement. If you have a legal counsel or advisor, have them also review it for you.
• If you're considering making a personal guarantee on a business that's not solely your own, think twice – or thrice. Generally, if you aren't the owner or manager of a company, you shouldn't be offering to back it on a standard bank small business loan.
Dig Deeper: Inc.com's Guide to Small Business Finance
Making a Personal Guarantee: Working with Your Lender
Though you may feel put on the defensive when a lender asks for you to put up a guarantee, it is possible to structure a loan that works for all parties involved.
"Ask yourself: Is it good for my bank, is it good for me, is it good for my business?" Matthews says. "If it's not, you have to look back and say, what's the impact on the losing entity here? Can it still work?"
Remember, your bank both has a lot to gain and to lose by taking a chance on you."We have seen the effects of making loans that do not have proper backing," Matthews says. "It just gets everybody in trouble – not just individuals, not just taxpayers, everybody."
You'll want to give them all the evidence you can to demonstrate that you are likely to succeed. Show them you have a great team working on your project, and powerful ideas at work. The more you persuade them of your business's chances for success, the more room you will have to negotiate on the personal guarantee.
That said, if the bank still wants a guarantee larger than you're prepared to offer, break out an old-school move. Bring a yellow legal pad and be prepared to write down another figure. Bankers can be receptive to a bit of bargaining; after all, if they've gotten this far in the loan process, they have already shown they do want to see you succeed.
Dig Deeper: Answering the Tough Questions Your Lender Might Ask
Making a Personal Guarantee: Additional Resources
How to Get the Financing for Your New Small Business: Innovative Solutions from the Experts Who Do It Every Day, by Sharon Fullen. Atlantic Publishing Company, 2006.
The SBA Loan Book: Get a Small Business Loan - even With Poor Credit, Weak Collateral, and No Experience, by Charles H. Green. Adams Media, 2005.
The Startup Garden, by Tom Ehrenfeld and Jim Collins. McGraw-Hill, 2001.
