Using Personal Guarantees to Secure Business Loans by J Corey Pierce
Business loans are a very important aspect of financing any size company. Anyone who has owned a business for any length of time knows how important adequate financing can be. Even if you do not need a loan to start your business chances are good you will, at some point, need extra financial help. Trying to go it alone might be possible, but it can also make owning your own business more frustrating, and hold you back from making the most of the company you work so hard to create.
You can improve your chances of getting a business loan greatly by using a personal guarantee. Using your own personal credit and assets to secure a loan has pros and cons, but is especially helpful if your business is just starting out and doesn't have enough of a track record to judge its performance, or enough assets to secure a large note.
Even if your own personal credit isn't good enough to secure a business loan, you can enlist others to secure the loan. If you have a willing family member, friend, or business associate with good credit they can use their personal credit to secure the loan as well.
Common Misconceptions
Many people who are new to obtaining a business loan or using their own personal credit to secure the loan fear it will have a negative impact on their credit score. They think that having a business loan connected to their own personal credit will keep them from obtaining more credit because of a higher debt ratio, or too many outstanding loans. However, this is not the case.
When you use your personal credit to secure a business loan you are acting as your business' co-signor. Like any co-signed loan since it is not actually being assigned to you, it will not show up at all on your credit report unless your business defaults on the loan and it becomes your personal responsibility to pay. The same holds true for anyone who uses their personal credit to secure your business loan.
Why Use Personal Credit for a Business Loan?
In a perfect world it would never be necessary to use your own credit for a business loan. However, the world is rarely perfect. Using your own credit as security for a business loan gives you more options and makes getting a loan more likely. Even if your business has assets it may not have enough to secure a loan. If you are looking to expand your business, getting a loan is the most logical way to get the money to do that.
In other cases a loan may be short-term such as a way to make payroll before an income period. This is one of the most valuable types of loans for a personal guarantee as it is likely to be paid off quickly.
Limitations and Downsides to Personally Guaranteeing a Business Loan
As a rule you are generally limited to banks and equipment lenders when using this type of loan security. Using personal credit to guarantee a loan makes particular sense if you are the sole owner/proprietor of your company. If, however, your business has partners it is a more risky endeavor since you are personally guaranteeing a loan that others have some influence over.
Your bank may require that all business owners sign for the loan as a personal guarantee. That is more in your favor even if you would prefer to be solely responsible. That way all partners are equally liable for the loan and more likely to be concerned about its repayment.
Negotiating Terms
If your financial institution requires co-signing on your business loan, or you personally decide it will be in your best interest don't just settle for a simple dotted line.
Ask for certain limitations such as modifications that allow for only a certain percentage of the loan to be guaranteed (25% of the loan value, or principle only). Ask that there be a cap that allows for the personal guarantee to be dropped once a business has a certain asset value. This can be particularly beneficial for new businesses that may not have the security for a loan at the start but eventually grows to the point that they are capable of securing the loan on its own.
Attempt to get the bank to disallow joint property. This would protect your family home if both you and your spouse are co-owners of the property. While these provisions may not always be possible, it is definitely in your best interest to request them.
Personal Guarantee Difficulties
Now even more than in the past getting a loan can be difficult thanks to the economy. Guaranteeing a loan using your own personal credit is more likely as a result even if your company has some assets and proven results.
Banks are most apt to grant a business loan that you personally secure, however, you will need to have good credit. Be sure to clean up your own credit past as much as you possibly can prior to applying for a business loan. It is important that your credit score be over 680, a low debt to income ratio, and not show defaults or missed payments in the relevant past.
If you have to ask a friend, relative or business associate to co-sign on a business loan it behooves you to thoroughly explain your circumstances. This can be an asset to you if your reasons are due to a lack of credit history or need for a larger amount than your own credit history can support.
If however, the reasons you cannot use your own credit as security is a history of default then you need to completely assure any possible co-signors that you have overcome your past habits, or give reasonable explanations for those past problems.
This is a good idea even if the person(s) you are approaching are family and aware of your past. The people who are standing behind your loan are doing you a massive favor and deserve every courtesy to set their mind at ease about the possible risks they are considering. Go as far to assure them of your eligibility for the loan as you would the bank itself.
Before Co-signing a Loan For Someone Else
If you are approached by a friend, loved one, or associate to co-sign a loan protect yourself. Get everything in writing regarding the terms of the loan. Ask the lender involved for the provision that should the loan go into default and you are required to pay it you can pay back only the principle on the loan not the interest involved.
No Absolute Guarantees
Even if you agree to personally guaranteeing a loan, or find someone with excellent credit to guarantee the loan there is no absolute guarantee that you will walk out of a bank with a loan in your hands. In the past it was possible to personally guarantee a business loan and not worry about proving a company's worth for the loan.
In today's economy banks are very strict with their lending practices and may still hold a business' credit report and track record accountable as a part of their considerations. However, a personal guarantee adds to your chances of getting a business loan and everything you can do to secure your chances helps to further your business.
Corey Pierce is CEO of BusinessFinance.com. Online since 1995, BusinessFinance.com has become one of the internet's largest resources for business owners in search of business loans. Corey has developed a free online business funding system that matches a businesses owner's need for capital to the requirements of over 4,000 business lenders. Find out more about getting your business loan approved at: => http://www.businessfinance.com .
Article Source: ArticleSnatch Free Article Directory
Business loans are a very important aspect of financing any size company. Anyone who has owned a business for any length of time knows how important adequate financing can be. Even if you do not need a loan to start your business chances are good you will, at some point, need extra financial help. Trying to go it alone might be possible, but it can also make owning your own business more frustrating, and hold you back from making the most of the company you work so hard to create.
You can improve your chances of getting a business loan greatly by using a personal guarantee. Using your own personal credit and assets to secure a loan has pros and cons, but is especially helpful if your business is just starting out and doesn't have enough of a track record to judge its performance, or enough assets to secure a large note.
Even if your own personal credit isn't good enough to secure a business loan, you can enlist others to secure the loan. If you have a willing family member, friend, or business associate with good credit they can use their personal credit to secure the loan as well.
Common Misconceptions
Many people who are new to obtaining a business loan or using their own personal credit to secure the loan fear it will have a negative impact on their credit score. They think that having a business loan connected to their own personal credit will keep them from obtaining more credit because of a higher debt ratio, or too many outstanding loans. However, this is not the case.
When you use your personal credit to secure a business loan you are acting as your business' co-signor. Like any co-signed loan since it is not actually being assigned to you, it will not show up at all on your credit report unless your business defaults on the loan and it becomes your personal responsibility to pay. The same holds true for anyone who uses their personal credit to secure your business loan.
Why Use Personal Credit for a Business Loan?
In a perfect world it would never be necessary to use your own credit for a business loan. However, the world is rarely perfect. Using your own credit as security for a business loan gives you more options and makes getting a loan more likely. Even if your business has assets it may not have enough to secure a loan. If you are looking to expand your business, getting a loan is the most logical way to get the money to do that.
In other cases a loan may be short-term such as a way to make payroll before an income period. This is one of the most valuable types of loans for a personal guarantee as it is likely to be paid off quickly.
Limitations and Downsides to Personally Guaranteeing a Business Loan
As a rule you are generally limited to banks and equipment lenders when using this type of loan security. Using personal credit to guarantee a loan makes particular sense if you are the sole owner/proprietor of your company. If, however, your business has partners it is a more risky endeavor since you are personally guaranteeing a loan that others have some influence over.
Your bank may require that all business owners sign for the loan as a personal guarantee. That is more in your favor even if you would prefer to be solely responsible. That way all partners are equally liable for the loan and more likely to be concerned about its repayment.
Negotiating Terms
If your financial institution requires co-signing on your business loan, or you personally decide it will be in your best interest don't just settle for a simple dotted line.
Ask for certain limitations such as modifications that allow for only a certain percentage of the loan to be guaranteed (25% of the loan value, or principle only). Ask that there be a cap that allows for the personal guarantee to be dropped once a business has a certain asset value. This can be particularly beneficial for new businesses that may not have the security for a loan at the start but eventually grows to the point that they are capable of securing the loan on its own.
Attempt to get the bank to disallow joint property. This would protect your family home if both you and your spouse are co-owners of the property. While these provisions may not always be possible, it is definitely in your best interest to request them.
Personal Guarantee Difficulties
Now even more than in the past getting a loan can be difficult thanks to the economy. Guaranteeing a loan using your own personal credit is more likely as a result even if your company has some assets and proven results.
Banks are most apt to grant a business loan that you personally secure, however, you will need to have good credit. Be sure to clean up your own credit past as much as you possibly can prior to applying for a business loan. It is important that your credit score be over 680, a low debt to income ratio, and not show defaults or missed payments in the relevant past.
If you have to ask a friend, relative or business associate to co-sign on a business loan it behooves you to thoroughly explain your circumstances. This can be an asset to you if your reasons are due to a lack of credit history or need for a larger amount than your own credit history can support.
If however, the reasons you cannot use your own credit as security is a history of default then you need to completely assure any possible co-signors that you have overcome your past habits, or give reasonable explanations for those past problems.
This is a good idea even if the person(s) you are approaching are family and aware of your past. The people who are standing behind your loan are doing you a massive favor and deserve every courtesy to set their mind at ease about the possible risks they are considering. Go as far to assure them of your eligibility for the loan as you would the bank itself.
Before Co-signing a Loan For Someone Else
If you are approached by a friend, loved one, or associate to co-sign a loan protect yourself. Get everything in writing regarding the terms of the loan. Ask the lender involved for the provision that should the loan go into default and you are required to pay it you can pay back only the principle on the loan not the interest involved.
No Absolute Guarantees
Even if you agree to personally guaranteeing a loan, or find someone with excellent credit to guarantee the loan there is no absolute guarantee that you will walk out of a bank with a loan in your hands. In the past it was possible to personally guarantee a business loan and not worry about proving a company's worth for the loan.
In today's economy banks are very strict with their lending practices and may still hold a business' credit report and track record accountable as a part of their considerations. However, a personal guarantee adds to your chances of getting a business loan and everything you can do to secure your chances helps to further your business.
Corey Pierce is CEO of BusinessFinance.com. Online since 1995, BusinessFinance.com has become one of the internet's largest resources for business owners in search of business loans. Corey has developed a free online business funding system that matches a businesses owner's need for capital to the requirements of over 4,000 business lenders. Find out more about getting your business loan approved at: => http://www.businessfinance.com .
Article Source: ArticleSnatch Free Article Directory