Whenever I am asked that question, I think of the four possible reasons why they would ask: either they are inexperienced, taking poor advice, have an awfully bad personal credit rating or they plan to commit fraud. I know that my underwriter would also add “if they don’t believe in their business then why should we get involved?”
In all the years I have been involved in small business finance I have never heard of a loan made without a Personal Guarantee (PG). It is too simple to close one business and open another or to change ownership or find some other way to avoid responsibility. Small business owners who wish to access debt need to be prepared to sign personal guarantees until their business is very, very strong.
Signing a PG is not a bad thing and does not stop those who believe in their business from accepting the kind of non-equity financial support they need to succeed. They are prepared to commit fully and personally. This includes providing their lender with a Personal Financial Statement (PFS) and tax returns.
A PG in a factoring arrangement is different. Factors look to their client’s customers for repayment and they eliminate most of the risk by doing proper accounts receivables due diligence. If the business owner delivers a good product or service, there is little chance of a PG coming into play.
Most PGs have little to do with credit worthiness and everything to do with real estate. Many business owners are going to learn this the hard way. Factoring provides a much more flexible form of finance that is based mostly on the strength of the accounts receivable themselves.
Business owners should look at their personal net worth as an asset and be prepared to leverage it when they need to. Over time, as their business grows and builds net worth, they will be able to limit and then lower their personal exposure. PGs are there mostly to help protect lenders against negligence, deception, and fraud.
The topic of PGs can be a sensitive one. It may not need to be brought up that beginning of a loan application but at some point, it should. As business finance professionals we must all learn how to deal with this. We know that when the contract is about to be signed and money is about to change hands a PG will be involved.
