In today’s small business world, nearly every loan will require a personal guarantee from you. This is also the case when you’re looking to finance the purchase of a small business.
Options for lessening liability of business owners, like limited liability companies (LLC), have become more and more popular. But as more business owners look to reduce liability, banks in turn are looking for owners to take on liability before they will grant financing.
A personal guarantee requirement is not a reflection of your credit worthiness or your bank’s assessment of the riskiness of financing your business. Before financing, banks simply want assurance of the owner’s dedication and continued involvement in the company. This is done in the form of a personal guarantee.
More often than not, the owner of a small business is the face of a company and the keystone. He or she has relationships with customers, employees, vendors and stakeholders. Owners know their business better than anyone else. Some businesses even become vulnerable when facing the loss of an owner during a sale. This keystone position makes them one of the most valuable assets of the company. Banks want to avoid losing this asset at all costs.
Banks will require an unlimited personal guarantee from either an owner or CEO. In some cases, like SBA loans, a personal guarantee is required by all owners whose share of a business is 20% or more.
Personal guarantees have become a standard practice. Expect to need one in a business transaction, but don’t take them personally.