How do you deal with lenders when you don't have any substantial assets? It's all about give and take.
Getting a small-business loan without the assets to back it up can be a confusing process. Here are a few answers to some of the most frequently asked questions from small business owners across the U.S.
Q: Can I negotiate out of a personal guarantee after my company establishes a credit history with my lender?
A: The word “negotiate” is important, since getting out of a personal guarantee is all about giving and taking. You have to prepare for this uneasy conversation, for both the borrower and the lender. If you want to get your lender to drop or reduce the personal guarantee, you need to have a plan.
First, make a list of the following:
Your company’s and your personal financial strengths and weaknesses.
Factors that mitigate your business and personal financial weaknesses.
Services and products that represent your company and your personal financial relationship with that particular lender (e.g. loans, deposits, cash management, credit cards, investment services, merchant services, etc.). This could be a bargaining chip that shows how extensive and valuable your business relationship already is.
Services and products you may have with other lenders. This could be of interest to your lender as it is an opportunity to expand your business relationship in exchange for full or partial guarantee release.
Second, focus on building a list of why you would like your personal guarantee released or reduced and how your company’s financial strengths will serve as a mitigating factor. Try to anticipate your lenders’ counterarguments; their job is to reject your request until you are able to persuade them that repayment of the loan will not be jeopardized despite the loss of a guarantee. A common mistake small business owners make is believing that the guarantee should be released, no questions asked. However, the best way to succeed in a business negotiation is to put yourself in the other person’s shoes and build your argument from there.
Once you are prepared for a meeting, have an honest conversation with your lender or account officer. Keep the meeting both professional and respectful, focusing on your goal. If you are unable to get what you want, ask why and learn what lender’s expectations and needs are. This information will help you succeed in the future with this or other lenders. Perhaps your lender will tell you under what conditions he or she might be willing to release or reduce your personal guarantee. Did you notice the word “reduce” mentioned several times? This could be an alternative to a full guarantee release. I have seen lots of partial guarantees in my lending career.
Make sure that you end your meeting professionally. Never burn bridges with lenders, unless a lender is unprofessional and brings absolutely no value into your business relationship. The lending community is rather small and your paths may cross again. People have long memories…
Q: Should I have a lawyer review personal guarantee forms?
I’d like to divide this question into two parts. First, should a lawyer review your personal guarantee agreement before you sign it? And second, should a lawyer review your personal guarantee agreement when your business is not doing well and there is a chance that your lender may call on your personal guarantee to repay the loan?
Chances are you are already using a lawyer to create and review legal paperwork that is part of the loan closing documentation. While nobody likes to pay high legal fees, the incremental cost of having an attorney review one more piece of paper is probably not that high. A lawyer can help you decipher what can be an incredibly complex language that only people who read it on a regular basis can understand.
Additionally, you should fully understand what your risks and options are under the letter of law. Review of a personal guarantee and some other key documents can give you a piece of mind and help you create a plan action, should things get worse and should lenders decide to call on your guarantee for loan repayment. Another benefit is lining up a lawyer who you may potentially use, if your company defaults on or otherwise unable to make loan payments.
Whatever you choose to do, make sure use that you fully understand what your rights and obligations are under the personal guarantee. Also note that each state’s laws tend to vary in handling, interpreting, and enforcing personal guarantees.
Q: I have no personal assets. What difference does it make if I give my personal guarantee? There is nothing to go after if my company fails to repay the loan.
A: When it comes to defaulting on a business loan, chances are the guarantor does not have significant assets to go after for a variety of reasons. Some guarantors move their assets in the name of their spouses or a trust to protect them from lenders, while others do not have significant financial assets because they were spent on trying to save the business.
First and foremost, a personal guarantee is in place as a constant reminder that you are responsible for loan repayment, should your company default on its loans. As I mentioned in my first article, a guarantee is a sign of your commitment to your business and your commitment to repaying the loan. I see a number of small business loans guaranteed by individuals who do not have any substantial assets of value to lenders. If your business loan was approved, it was probably approved for reasons outside of your personal assets.
Some lenders may not approve small business loans without a personal guarantee even if you have personal assets to offer. It is just a business practice for a number of lenders. They want to exert psychological pressure more than anything else. In addition, through your personal guarantee lenders may negatively affect your personal credit history and credit score if your company defaults on a business loan and you will not make good on your personal guarantee. A tarnished record history will likely prevent you from securing small business loans in the future. The banking industry believes that history is a good predictor of your future behavior.
I hope you will find this information helpful. Additional information on this and other topics can be found in my book Loan Financing Guide for Small Business Owners. I also encourage you to send me your questions my emailing me at neil@LoanFinancingGuide.com or contacting me from my website at www.LoanFinancingGuide.com.