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Release me! Escaping the personal guarantee
By Jay MacDonald Bankrate.com

You argued, you negotiated, you presented your case as aggressively as possible, but in the end you were still required to sign a personal guarantee to obtain that commercial loan for your small business.

Now what?

Must your house be held hostage until every last penny of that loan is paid back? Not necessarily.

Granted, your options aren't exactly plentiful once you've agreed to put up your personal property in addition to business collateral to close the deal. They expand somewhat if you successfully limited your personal liability to a set dollar amount, limited the term of the personal guarantee addendum or took steps to spread the liability among other principals in your company, as discussed in "Bet the House on your Business and Win!"

But the best time to cut your potential losses -- during the original loan negotiation -- has passed.

Now that the ink is dried and your lender has your home mortgage tucked neatly into that loan folder, they are going to be reluctant at best, if not absolutely forbidden, to give it up. Your goal: convince them to release you early.

Work with, not against, your lender
Let's start by looking at your cup as half-full: You landed the loan. You convinced your lender that you can pay it back with the cash flow from your business (that should business drop off for some reason you have a secondary source of money -- your business collateral -- to keep the payments coming and in the unlikely event your collateral comes up short, your home and other personal assets stand behind the loan).

Now let's look at the loan itself.

If you obtained your loan through a credit union, chances are slim you will get your house note released early.

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"To obtain a credit union loan, you have to be a member, and you have to sign a personal guarantee," says Dave Marquis, director of examination insurance for the National Credit Union Association. "If a person wants to start up a business under a corporate structure, they can't avoid the liability issue, or lack thereof, in that type of loan."

Do the rules differ when you apply for a second, third or fourth loan?

"No," says Marquis. "Same rules."

Bottom line: expect your credit union to hold you personally responsible for the full term of the loan. With few exceptions, it's in their charter.

If you obtained a Small Business Administration loan through a commercial lender, there may be considerably more wiggle room to free up your personal assets early, according to SBA spokesman Mike Stamler. That's because the SBA guarantees loans based primarily on cash flow, whereas most commercial lenders typically require lots of collateral in addition to a healthy money stream.

Are there then scenarios by which the personal guarantee might be released?

"There could be," he says. "If your business is thriving, you might consider partially prepaying the loan. That brings down the principal amount and presumably your collateral value has increased and those two might be a lot closer together by that time. There is a mechanism where you can ask that to be done, but it's not an automatic thing. Basically, the answer is to call your SBA district office and ask them what can be done."

Even without prepaying, time itself may work in your favor with some SBA lenders.

"If you've paid down the loan and your collateral has increased in value to where they may have met, in that situation the personal guarantee is no longer necessary because then the loan is collateralized," says Stamler. "That could be a change that could be negotiated."

In that scenario, however, the onus will be on you to track your loan progress and patiently wait to approach your lender until the numbers make it a no-brainer for them to at least consider granting your release.

Walk a mile in their wingtips
OK, credit unions can't budge and SBA lenders might. What about those collateral-minded commercial lenders?

In general, they are going to be very reluctant to give up their hold over your personal assets unless you make a compelling case for them to do so. Even then, they may not have the freedom to grant your request. Cost and lending policies may be carved in the corporate stone and not negotiable.

Start by putting yourself in their wingtips.

Your bank loan officer makes money by lending money. They know that a healthy, growing small business may take out several commercial loans in the future and be a solid merchant customer as well. They also know that small businesses don't always stay small. The lender also may be under increased pressure to build loan volume as banks continue to consolidate. The last thing they want to do is foreclose on your house -- not only do they recoup very little from doing so, they also lose a client and other potential loan customers in the whole nasty process.

Bottom line: They may be willing to inch ever so slightly out on a limb to release your personal guarantee IF they believe 1) it will garner your undying loyalty in the years to come and 2) you won't make them regret it.

Remember all the work you did to present your business to them in the first place? Now you need to repackage it along with a letter clearly requesting release of your personal assets and personally demonstrate why you believe your business is now strong enough to secure the loan on its own.

Here's what they'll want to see on paper before even considering your request:

  • Your company's profitability and performance have exceeded expectations;
  • Your credit and repayment history is excellent;
  • Your improved cash flow and/or collateral are now sufficient to guarantee the outstanding loan amount.

Gini Graham Scott, author of Collection Techniques for a Small Business, says little things such as staying off the overdraft report can mean a lot when it comes time to requesting release of your personal assets.

"Your credit ratings are really, really important. You really need to clean that up. Sometimes what people fail to realize is, even if you have a $100 disputed bill that somehow ended up on your credit report, it can raise a flag."

If your lender still won't cough up your house note, see if they would be willing to substitute other personal assets sufficient to cover their exposure. If they won't consider that, try to get them at least to agree to sit down at a specific future date to rehear your case.

Remember: As the loan is paid down, you and your lender have less and less to lose. See if they will work with you on a little goodwill hunting in the interest of your future business together.

Jay MacDonald is a contributing editor based in Florida

-- Posted: March 9, 2001


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