Release me! Escaping the personal guarantee
By Jay MacDonald Bankrate.com
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.
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,
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.
"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
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
Jay MacDonald is a contributing
editor based in Florida