Am I required to Sign a Personal Guarantee for a Business Loan?
If you are getting an SBA loan, you may not have a choice. In most instances, SBA regulations will require the owner of a business obtaining an SBA loan to sign an unconditional guarantee. But there are a great many business loans made which are not SBA loans, so let’s focus primarily on non-SBA commercial loans, which can come in a multitude of structures and types.
First, you should expect that the lender is going to ask for the personal guarantee. A bank will almost always have personal guarantees on its list of requested items and loan officer may even tell you that the personal guarantee is non-negotiable and must be part of the loan package. I have nothing against banks or bankers (speaking generally), but there are many corporate loans made, in a variety of circumstances, where the owner(s) of the company receiving such financing do not sign a personal guarantee. For example, let’s use the example of Google (just as per our discussion on personal guarantees in the context of leases). Google is a public company with lots of revenue and lots of cash. Nobody at Google, shareholder or executive, is signing a personal guaranty when Google gets a line of credit or another type of a loan from a bank. The same is true for many privately-held companies much smaller than Google which are able to get commercial financing without personal guarantees.
In many instances, the business loan is secured by some form of collateral–whether that is accounts receivable, real estate, equipment and/or some other asset of the company. If there is adequate collateral to secure and support the loan being made to the company, a lender is then protected from non-payment or other default and does not need to have a personal guarantee from one or more business owners. But be careful here because sometimes, even though the bank does not need such personal guarantee, that does not mean the bank will not still ask for the personal guarantee. Let’s face it, we all like to feel protected and secure (speaking generally of human nature) and banks are run by humans who feel the same way, and even more so when it comes to lending money.
Even if the company is getting an unsecured loan (i.e. no collateral being provided), there are many instances where such unsecured loans are made without personal guarantees by the owners of the company. Such unsecured lines of credit or other unsecured loans are made most often to established business enterprises where the lender has the benefit of stable credit history, predictable cash flow going forward and other assurances that the business is not much of a credit risk. Such unsecured loans are also more likely to be made when the ratio of loan amount to overall cash flow and company value is quite small. In other words, a business that has $10,000,000 of annual revenue will most likely have little problem getting a $50,000 line of credit or credit card limit (as we know, credit cards are simply unsecured lines of credit). On the other hand, that same $10,000,000 per year company will have a difficult time getting a $5,000,000 unsecured line of credit or anything close to that amount of unsecured debt.
The main point of this discussion, as well as the prior discussion relating to personal guarantees in the context of leases, is that there are proper times and places for personal guarantees and there are also situations where it is not reasonable or appropriate for a lender to require a personal guarantee. Without intending to demonize all lenders and bankers, you should expect that by default, the lender will ask for a personal guarantee when a business loan application is submitted. It is then incumbent upon the business owner to consider whether that request is warranted and if not, to push back on that request.
Don’t be afraid to ask for help in these types of situations from your accountant, attorney or some other trusted advisor other than your banker.