Don't take the Guaranty personally

March 19, 2024

by a lender from Saint Joseph's University - Erivan K. Haub School of Business in Denver, CO, USA

A theme I see on here quite a bit is the idea that the primary difference between SBA and non-SBA (or conventional) financing is that SBA requires a personal guaranty. A good idea is to assume you'll be required to provide that in either case. Because if you won't stand behind the loan, why should the bank?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I have this discussion with clients often. We are a Commercial Loan Brokerage shop and we have over 500 funding partners, and I can tell you from experience there are very few deals that get done between small business banking and lower middle market banking without personal guarantees. That is because very few businesses have the balance sheet liquidity, equity and assets to fully support the requested loan amount. With many small to mid-sized businesses, it can be very hard to see where the corporate balance sheet ends and the personal financial statement / balance sheet begins because the owners net worth is so directly tied into that of the business. That is one of the primary reasons the guarantee is required. To be sure the owner(s) who fully control the business act in the best interest of the business, and if they do not, they have the liability for not having done so.

Lenders also like personal guarantees for the leverage they provide them on the owner. Non-recourse / un-guaranteed loans have a significantly higher loss rate on average then fully guaranteed loans. That is because the owner can walk away and provide very little assistance to the Bank. Having that personal guarantee entices the owner to work with the Bank. More money is going to be recovered by the Bank with the guarantor assisting then if the owner walks.

In my over 25-year career I can only count a handful of cases where I saw a Bank really pursue a personal guarantor. In most cases they settled with the guarantor rather than pursue them legally. Only if there is a true loss or something meaningful a lender thinks they can get from a guarantor will they typically pursue them. The cost to pursue someone is expensive, and usually by the time they get a judgement and discover assets, there are few assets left to collect on, and that is only if the guarantor has not filed for bankruptcy in the meantime.

For transactions under $20 million it is rare to see non-recourse loans unless the business has a very strong balance sheet, the debt service coverage ratio is very strong, and the loan is fully secured by hard assets at normal conservative business advance rates. Unless you are doing some specialty product or non-bank product, the personal guarantee is typically going to be required by just about all institutions and is mandated by the SBA for all 20% or greater owners of the business. Even some products that claim to be non-recourse still require what are referred to as "bay-boy carve outs", meaning if the ownership does something illegal that the owners can then become personally liable. So even in those cases, the loan is not really fully "non-recourse".

Happy to discuss in more details with anyone at redacted

Reply by a searcher
from University of Technology Sydney in Sydney NSW, Australia

Personal Guarantee (PG) in some cases is a MUST, but it should be illegal in corporate finance and business transactions because mixing personal finance with corporate finance simply does not make any sense as it completely defeats the purpose of having a company as a separate legal entity and completely eliminates limited liability of directors and makes you give up legally prescribed "corporate veil" which protects directors. Directors should be liable only for breach of directors' duties and in criminal cases (fraud, insolvent trading etc.) but definitely not if something goes wrong with the company which is not the director's fault. Furthermore, it all depends on the deal structure you made with the seller (the better the deal, the less need for PG), your historical business transactions with the banks and your personal financial position (assets +liabilities) whether or not the PG will be required by the banks. Thus, I am of the opinion that if the company you are purchasing is very profitable and liquid, has great prospects of growth success and promises great profit on exit and you put all your property on irrevocable Trust where you are not the Trustee and if you can afford to provide the PG, then only in that case you should do it, otherwise do not do it.

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