Banks that do not Require Personal Guarantee
February 13, 2023
by a searcher from Kettering University (GMI) in Detroit Metropolitan Area, MI, USA
I am interested if anyone knows of banks that do not require a PG? What I seem to find is that SBA lenders cannot get much of a PG from young searchers who do not have a lot of personal assets. However, for mature searchers, those same banks would like to lock up everything that has been built over time which seems inconsistent in the treatment.
in United States
The SBA SOP requires a personal guarantee from all owners with 20% or more equity in the business. In some cases, even the spouse of the proposed owner will need to sign a limited personal guaranty for the equity portion of the homestead residence.
It is essential to understand that some front-end SBA lenders or business brokers speaking as an SBA lender may not have these critical conversations with potential buyers early on, leading to unexpected roadblocks in the acquisition process.
Transparency, experience, and SBA education of front-end bank lenders must ensure that all parties fully understand the terms and expectations of the bank loan structure backed by the SBA out of the initial conversation gates.
***Side note - remember that the SBA doesn’t provide the capital; the various bank and nonbank lenders do. These lenders must follow SBA SOP to ensure that the SBA guaranty to the bank is not at risk should the bank loan go belly up.
Each bank and nonbank lenders have in-house business acquisition lending credit guidelines written to be followed by their underwriters on top of the SBA SOP that can challenge navigating loan approvals and best structures as a business buyer/borrower.
I have witnessed bank lenders require a personal guaranty on less than 20% of owners based on the risk presented in the deal. This was a specific bank credit policy. Some banks passed on these deals, period — whereas other banks were comfortable to move forward with credit approval if the less than 20% owner would offer a personal guaranty to mitigate risk in the deals.
SBA SOP credit policy and eligibility "is what it is" - no exception.
Bank and nonbank SBA 7(a) change of business ownership loan project credit policies and credit appetites are ALL different and change often, making it challenging and highly time-consuming for business buyers to navigate bank change of business ownership loan projects, backed by the SBA.
Thank you ^redacted
from Harvard University in Omaha, NE, USA
1. Track record. I demonstrated to the bank the strength of my business model, and they grew more comfortable with the business over time.
2. Since I was in "do no harm" mode with my business in the first year of ownership, I prioritized paying down debt with excess cash flow. I paid off my initial term loan in 20 months. I then moved to do a debt-driven recap of my business to lever back up, and I was able to secure a non-PG loan at that point.
3. To Lisa's point above, once I hit $3M in EBITDA, no bank has required a PG on any financing I've done.
It's hard to find a non-PG loan on your first deal, but you can focus on mitigating the risk of having a PG. You can do this by buying a business with dependable characteristics:
- No customer concentration. I consistently see people turning themselves into pretzels on here, trying to justify customer concentration. My advice is to avoid it and kill any deal with it.
- Asset-light businesses. They're less of a drag on free cash flow. Give yourself more options on how to use that cash.
- Pricing power. You need a business that has pricing power with its market base. You can fight margin contraction risk and protect your cash flow, if not increase it.
- EBITDA Margin greater than 20%. The rule of thumb in search is at least 15%, but I always focused on 20% or better. More free cash flow, especially in an asset-light business.
- Finally, of course, high recurring revenue and high repurchase rate. Dependable and predictable cash inflows help you sleep well at night.
No surprises here. Taken together, they greatly mitigate the risk of your PG, not to mention all the other benefits of this type of business. I have these characteristics in my company, and this military-veteran-turned-first-time operator never worried about triggering the PG.