Personal Guaranty: Why You May Need to Make One

One of the reasons businesses shift from sole proprietorship to Limited Liability Company (LLC) or Corporation is to “limit” their exposure to liability and protect the owner’s personal assets. A great strategy overall but one which may not apply to newly formed entities or tightly held companies with marginal financial performance when it comes to financing.

A newly formed LLC, like any new business, will not have enough credit history or time in business to garner a lender’s approval on a new finance request. The same is true for a small corporation which has less than an “A” credit rating. A lender will usually not approve a “company only” or “corp only” finance if the business track record does not warrant it. The current climate is that lender’s are asking for personal guaranties more often if the business does not meet its’ guidelines.

This can be quite upsetting to the seasoned business veteran but times have changed and past approvals, just because you’ve been in business for 15 years, are no longer happening. Personal credit rating, cash flow, tax returns, sales and other indicators have to be examined and accepted prior to any approval.

“Average” businesses which have the owner’s Personal Guaranty are getting approved more quickly and at lower rates; “average” businesses without a guaranty are not. What’s your risk with a PG? Usually, it is a blanket lien on all your assets in the case you default on the finance. The lender wants you to believe that your business will be there tomorrow and succeed; if you don’t stand behind it then who will?

Finance and expansion decisions should be carefully made, weighing all the risks before jumping into new debt.