Article by Roger Schlueter
Personal Guarantees on Business Loans are as certain as Death and Taxes! I have talked about this before but many business people just don’t understand. Just because they have their company set up as a LLC or Corporation, the bank will still want their Personal Guarantee and their Spouses Guarantee.
Most Banks will get Guarantees from the Owners of the business and any other Businesses that the owners own. The Bank will also want the spouse to guarantee the loan unless the Borrower Applies as Personal Credit and Only Shows their Assets and Income to Pay Off the Loan. Usually the Bank will still want the Spouse and will insist on a Marital Waiver if the spouse is not on the loan. The Marital Waiver excludes the spouse from claiming a stake in the Value of the Business in case of a Divorce.
Banks do not care what level of ownership the individual owns, they usually want a Secured or Unsecured Unlimited Personal Guarantee. That said, sometimes banks will let a Minority Owner of less than 20% sign a Limited Personal Guarantee. This Limited Personal Guarantee is just that, limited to an amount of money. It can be a percent or an absolute dollar amount.
The U. S. Small Business Administration or SBA will always want a Personal Guarantee from the borrower and their spouse. They sometimes must be reminded of Regulation B (Federal Law which applies to the Federal Government as well as all of us) which states that they cannot arbitrarily demand a Personal Guarantee from a spouse. The Individual can apply for Credit on their Own Behalf but cannot put the spouse on their Personal Financial Statement. This Usually is a problem when the Spouses own Joint Assets like Real Estate. The Joint Asset, that is owned Jointly, will give the Bank or SBA the right to ask for a Spouse Guarantee. I have seen people use only their assets and income to apply and not have a spousal guarantee but this is usually when they have segregated assets.
Alternatives for Credit when you do not want the spouses personal guarantee are Unsecured Loans or Lines of Credit usually in the form of a Credit Card. They, of coarse will carry a higher interest rate of 14% to 24% rather than a Bank Interest Rate of 6% to 8% (this is the rate as of 5/24/2013). Usually unsecured debt will not be as structured as debt that is secured against assets.
I have seen companies try to get around this issue by having let’s say Ten or more owners that each have 10% or less ownership. The rule is 20% for a personal guarantee with SBA but SBA will ask for all under the above ownership situation. Under the above situation the Bank or SBA may give Limited Guarantees that may be limited to the borrowers ownership in the business. The Key Words here are MAY GIVE.
This has been an overview of the Business Loan Personal Guarantee that is obtained by Banks and SBA on Business Loans. Please respond though the blog with questions or comments. My Email is roger@rogerschlueter.com