You Can Use These 5 Steps to Negotiate a Personal Guarantee



5 Steps to Negotiate a Personal Guarantee - pic of businesspeople shaking hands

Seasoned business owners know that signing personal guarantees is part of the game. But what exactly does this personal guarantee (PG) mean for business owners, their partners, and even their loved ones? And is there anything that can be done to navigate this common business practice? To shed light on these questions, we’ll walk you through 5 steps to negotiate a personal guarantee and provide more insight into this standard business procedure.

How To Negotiate a Personal Guarantee

Mishandling a personal guarantee can have grave consequences. Small business owners owe it to themselves to develop a PG negotiating strategy before sitting down in front of a loan officer. If the loan defaults, the bank can then go after things like homes, bank accounts and investments – and they don’t even have to wait until the business assets have been liquidated to address the outstanding debt.

The following five steps are a practical guide for walking through the negotiating process in order to get the best deal possible while mitigating the risk of losing hard-won personal assets.

1. You Need to Know What You’re Signing

There can be a wide variance in the terms of a PG. For instance, they may permit the bank to go after personal assets even if there isn’t an outright loan default.  Triggers can include a technical default, additional borrowings, sale of assets, death or incapacitation.

Other times, the PG can allow the pursuit of additional collateral on demand if the lender believes the loan is under-secured. While many business owners mistakenly believe incorporation acts as legal protection that prevents a lender from pursuing personal assets, this is not the case when a PG is in force.

You Can Use These 5 Steps to Negotiate a Personal Guarantee

2. Know Who You Are Signing With

In partnership scenarios, each person usually signs a “joint and several” PG agreement. You might think that this spreads the risk out evenly among the partners, but that is not the case.

In fact, the lender is free to pursue whichever partners it wants and those with the most liquid assets are usually the most vulnerable. As a result, a partner can find himself in the difficult position of pursuing relief from other partners – who are often friends or family members – on his own.

3. Determine an Acceptable Level of Risk

As a business owner or partner, you need to determine your own acceptable risk threshold, both on a business and personal level, before approaching the bank. This means calculating the assets you would need to satisfy the PG. You also need to bear in mind the fact that if the business is challenged – more than likely the case if the loan is being called – its assets will be worth much less than book value.

Based on this assessment, you can calculate how much of your personal assets to risk on the loan and still sleep at night.

You Can Use These 5 Steps to Negotiate a Personal Guarantee

4. Negotiate the PG Terms

While nearly every term in the PG can be negotiated, you need to figure out which ones are most critical to you as well as which ones the lender will not likely want to change. Armed with this knowledge, you can map out your strategy for negotiating both the PG and the loan documents.

Here are a couple of negotiating tactics to consider:

  • Limit the guarantee: Banks will always want an unconditional or unlimited guarantee, but you can ask that it be limited either in terms of actual dollars or based on a percentage of the outstanding loan. In a partnership situation, you can ask the lender to limit the amount of exposure based on the size of each partner’s owner ownership stake.
  • Suggest terms of relief: Ask to be relieved of the PG after a certain percent of the loan has been repaid. You could also suggest that it be reduced as a key financial metric improves, such as your debt-to-equity ratio. Another option could be to ask that the amount or percentage of the PG be decreased after five years of issue-free loan payments.

5. Keep the Door Open to Future PG Negotiations

Even after the PG is signed, you can always approach the bank to reopen negotiations for a loan and guarantee terms based on changes in your situation, such as improved financial performance or increased collateral. Having personal guarantee insurance can also allow you to seek loan/PG concessions.

You Can Use These 5 Steps to Negotiate a Personal Guarantee

Negotiation StepsDescription
Know What You’re SigningUnderstand the variability of PG terms, including triggers that allow lenders to target personal assets beyond loan defaults. Recognize that incorporation doesn't shield personal assets when a PG is active.
Identify Parties InvolvedComprehend partnership dynamics—signing a "joint and several" PG doesn't evenly distribute risk. Lenders can target partners with more liquid assets, potentially leaving certain partners vulnerable.
Assess Acceptable RiskDetermine your risk threshold on both personal and business levels before approaching the lender. Account for potential depreciation of business assets if challenged, recalibrating the calculated risk on personal assets needed to satisfy the PG.
Negotiate PG TermsIdentify crucial terms to negotiate based on your priorities and lender's preferences. Develop a negotiation strategy encompassing PG and loan documents.
Strategize Relief and Future NegotiationsEmploy negotiation tactics: Limit the guarantee amount or request terms of relief—e.g., PG relief after a certain loan repayment percentage. Keep avenues open for future negotiations, reengaging with the bank as situations evolve or financial performance improves. Personal guarantee insurance can facilitate seeking loan concessions.

Understanding Personal Guarantees

While they are nothing new, personal guarantees have become commonplace as tight credit conditions have forced banks to become increasingly conservative in their lending practices. To understand it better, A PG is a note signed by a business owner, partner, investor or family member – also known as a loan guarantor –– that puts up personal assets in addition to business assets as loan collateral.

 

Navigating Personal Guarantees Strategically: The Takeaways

The business world is always in flux; within it, personal guarantees have become quite common. That means that business owners and even their families promise to use their personal assets, like homes and savings, as a backup if their business loan can’t be paid back.

These guarantees are of critical importance, so businesspeople should know what they’re signing. Some agreements let the bank go after personal assets even if the loan isn’t entirely unpaid. As such, a PG is not a shield if things go wrong with the business.

So, before agreeing to a personal guarantee, follow these steps:

  1. Understand what you’re agreeing to: Some guarantees have different terms and reasons for action. Know them.
  2. Know who’s involved: In partnerships, all partners usually sign, but it doesn’t mean equal risk.
  3. Figure out how much risk you’re okay with. Decide how much personal stuff you’re ready to risk if things go bad with the loan.
  4. Talk about the guarantee terms: Negotiate with the bank to get terms that work for you, like limiting how much they can take or when they can stop asking for your personal stuff.

As a final word, it’s essential for business owners to remember that while personal guarantees may be a standard practice, they are not set in stone. With careful planning, negotiation, and ongoing communication, business owners can protect their personal assets and ensure a more favorable financial future. Stay informed, seek professional advice and approach personal guarantees with confidence and strategy.

Frequently Asked Questions

What is a personal guarantee (PG) in the context of commercial loans?

A personal guarantee is a legally binding agreement signed by business owners, partners, investors, or family members (loan guarantors) that pledges personal assets alongside business assets as collateral for a commercial loan. If the loan defaults, the lender can pursue personal assets like homes, bank accounts, and investments to recover the outstanding debt.

Why are personal guarantees commonly required by lenders?

Personal guarantees have become standard practice due to tight credit conditions, leading lenders to adopt more conservative lending practices. By obtaining a personal guarantee, lenders can secure additional collateral beyond business assets to mitigate their risk in case of loan default.

What are the potential consequences of a called personal guarantee?

When a personal guarantee is enforced, it can have significant financial repercussions. Lenders can seize personal assets, including homes and investments, to cover the unpaid loan amount. Business owners, partners, and family members who signed the guarantee are at risk of losing their personal assets.

How can business owners negotiate favorable personal guarantee terms?

To negotiate a personal guarantee effectively, follow these steps:

Step 1: Understand the terms: Personal guarantees can have varying terms and triggers. Familiarize yourself with the terms, such as when the lender can pursue personal assets.

Step 2: Identify parties involved: In partnerships, all partners usually sign a “joint and several” PG, which means the lender can pursue any partner individually. Be aware of this and consider the implications.

Step 3: Determine risk tolerance: Assess your acceptable level of risk both personally and for your business. Calculate the assets needed to satisfy the guarantee and consider the potential depreciation of business assets.

Step 4: Negotiate terms: Negotiate critical terms of the personal guarantee with the lender. Consider strategies such as limiting the guarantee amount or suggesting relief terms based on loan repayment progress or financial metrics.

Step 5: Keep negotiations open: Even after signing a personal guarantee, continue to monitor your situation and approach the lender for renegotiations based on changes in circumstances, improved financial performance, or increased collateral. Personal guarantee insurance can also aid in seeking concessions.

Can personal guarantee terms be negotiated with lenders?

Yes, personal guarantee terms can often be negotiated. While lenders typically aim for unconditional or unlimited guarantees, borrowers can negotiate limitations on the guarantee amount or terms for relief, such as reducing the guarantee as loan payments are made or as financial metrics improve.

What options do business owners have to minimize personal guarantee risks?

Although it might not be possible to completely avoid personal guarantees, business owners can take steps to mitigate risks. Seeking advice from professionals like attorneys or accountants, developing a well-thought-out negotiation strategy, and exploring personal guarantee insurance are all effective approaches.

How can a business owner approach renegotiations after signing a personal guarantee?

After a personal guarantee is signed, borrowers can approach the lender to reopen negotiations based on changed circumstances, improved financial performance, or increased collateral. Personal guarantee insurance can also facilitate seeking concessions from the lender.

What resources can business owners utilize for successful personal guarantee negotiations?

Business owners can benefit from seeking advice from qualified professionals such as attorneys, accountants, or financial advisors. These experts can provide valuable insights and assistance in developing a strategic approach for negotiating personal guarantee terms and loan conditions.

What is the importance of carefully planned negotiation strategies for personal guarantees?

A carefully planned negotiation strategy is crucial to secure the best possible terms for personal guarantees and commercial loans. With expert guidance and a well-thought-out approach, business owners can minimize risks and protect their personal assets while navigating the complexities of personal guarantee agreements.

Are personal guarantees unavoidable in the current economic climate?

While personal guarantees might not be entirely avoidable given prevailing credit conditions, business owners, partners, and family members have options to mitigate risks. By seeking professional advice and following strategic negotiation tactics, individuals can navigate personal guarantees while safeguarding their personal assets.

You Can Use These 5 Steps to Negotiate a Personal Guarantee

 

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9 Comments ▼

James R. Coughlin James R. Coughlin is Chief Underwriting Officer of Asterisk Financial Inc. He we previously a Senior Credit Risk Manager and Senior Vice President for Webster Bank, N.A. Coughlin has over 20 years of commercial banking experience, including extensive work in credit risk assessment, risk management and regulatory compliance across all commercial and consumer asset classes.

9 Reactions
  1. After 25 years in the construction business I learned early on that you should never sign a personal guarantee. Even though you know with a high degree of certainty that what you are entering into is going to be a success, there is much that can crater a project that is beyond your control. If a vendor or a bank can’t enter into a project with you as a partner then you don’t need them. As nice as they are up front as soon as something happens they get nasty real fast. Don’t do it!

  2. Great list of tips. Thanks for sharing them with us.

    Ti

  3. Great article. As an aside, I feel like there’s a real lack of conversation around soft skills training in the business blogosphere. Negotiating is every bit as much an interpersonal task as it is a business one.

  4. I have advised my husband, who is co-owner of a business to NEVER sign a Personal Guarantee. He simply will not do it, and it’s never been a problem.
    Another thing business owners ought to do is get all personal property out of their names, and into a trust. This protects personal assets (houses, bank accounts, vehicles, etc.) in the event of some catastrophic lawsuit involving the business. For example, a truck driver seriously injures or kills someone while on the job. Obviously, a trucking company has insurance, but if there’s a lawsuit, and a resulting judgment is higher than what the insurance will pay, an owner’s pesonal assets, if not protected, could be attached. There can be no attachment of personal assets, if all personal property is held in trust.

  5. Thanks for posting these great tips on your article.
    Just one more to add.. if you are lucky enough to live in the UK, you can insure your liability under your PG, in the event your company fails and the PG is called upon.

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