Will I have to sign a personal guarantee?

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Transcript

In this lesson, we're going to talk about personal guarantees. This is a very common question I get from people who are applying for a business loan, they want to know if they're going to have to sign a personal guarantee. And what a personal guarantee is, is when the owner is guaranteeing that they will make the payments on the loan if for some reason that business can't make a payment. I will tell you before I go into any of this other information that 90% 99% of the time, businesses, business owners will be asked to sign a personal guarantee. We'll say that there are types of loans where you won't be required to do that they're typically higher risk and much much higher interest rates. They're also called non recourse but for today's purposes of this lessons purpose, know that you will most likely be asked to sign a personal guarantee.

And all of the loans I've done in my entire career. I've only seen one where the business was so strong, so established and had been around for 30 years that the owners were not asked to sign a personal guarantee. So People who would be asked to sign a personal guarantee is typically anyone who has more than 20% ownership of the business. So if you're a minority shareholder, you own 10% of the company, you may not be asked to sign a personal guarantee. Unless the next bullet point, there's not a majority or 51% ownership represented, assigning a personal guarantee. So if there are three partners, and one of you owns 80%, and the other own 10% apiece, those two that own 10% may not may not the keyword be asked to sign a personal guarantee.

And another example, if one owner has 40% and the other two have 30% apiece, it could be that the 140 percent owner and 130 percent owner, if they're the most strong financially are asked to sign the personal guarantees. And perhaps the third owner is not asked to that's something owners have to address outside alone, whether they're going to you know, allow that third partner Not the sound of personal guarantee. But just know that most likely you will be asked to sign a personal guarantee. Now there are two main types of personal guarantees, one is a full guarantee, and one is a limited guarantee. For the most part again, you will be asked each and every owner to sign a full guarantee. And what that means is that the lender can hold each and every owner individually responsible for the full amount of the loan back to the hundred thousand dollar real estate purchase that I've used as an example in the past.

If you have three owners doesn't matter what their percentage ownership of the company is, if they sign full guarantees, and the bank seems to not be able to collect from the first two owners they can call that third owner and ask them to pay back the hundred thousand dollars a limited guarantee is exactly what it sounds like. You could be limited to only the ownership stake that you have. So if you have 51% ownership in the business and you're assigning a limited guarantee that's associated with your ownership stake, you would only be 51% responsible so 50 1000 of $100,000. Or you may be signing a limited guarantee that is broken up evenly across the owners regardless of shares that they have. So just know that there are full guarantees, which is most likely what you will assign. And then there are limited guarantees.

And again, I'll reiterate that alone without any guarantee is called non recourse if you hear that term, know that there is no guarantees. These are often asset based loans or high risk loans. So why do you have to sign a personal guarantee? Well, guess what, particularly early in a business, you are the company. If the business has been around less than a year, most likely, it's not very financially stout right away. And even companies that have been around 10 years may not be on extremely strong financial footing.

And so early on the founders, the owners are the company if you're not willing to back your company and this is a key question I want you to think about one of the things that lenders consider is if you aren't willing to sign a personal guarantee, then why should The lender give you that money meaning if you're not willing to personally take a risk, why should the lender take a risk, that's something that's going to be in their head, you need to know that and be thinking about that. Loans without personal guarantees are very, very uncommon. Again, anticipate going into your loan requests, especially if your company has not been around very long or you show big losses, know that you will have to sign a personal guarantee. And when non recourse loans without personal guarantees are done, we're talking extremely expensive interest rates, you need to weigh whether if you are offered a non recourse loan, if you're willing to pay that 10 1215 20% interest rate in exchange for not signing your personal name, you're adding a whole lot of extra payments to the business that it has to make.

And so in some instances, it's just better to go ahead and sign the personal guarantee and move on.

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