Avoiding Personal Guarantees: Loans are Fun Again

Seems like every time I start a new business, I start it at the bank.  In the chair.  In front of the loan officer.

• ME: “I’ve got another great idea Mr. Banker.  I just need a loan for $600,000 to buy a greenhouse.”
• BANKER: “That’s fine Mr. Worrell.  So long as you agree to give us your home, your car, your children and your opposable thumbs as collateral.  Just sign this Personal Guarantee and we’re all set.”

Have you been in that chair too?  (If not, I assure you… it awaits in your future!)

I always complain about Personal Guarantees.  But I always sign them.

So imagine my surprise when I read about a way to actually NOT PAY a Personal Guarantee.

I didn’t say “avoid a personal guarantee“.  I said “not pay” one.

Yes, you can try to negotiate a Personal Guarantee that is less risky for you, but when it comes down to it, most bankers just say no.  Bankers are adicted to PG’s and even my favorite community banks in particular are so risk-averse that they simply cannot make a loan without a persaonl guarantee.

I asked once how big I’d have to grow the business to avoid the dreaded PG…  “Pretty Big” was the answer.  In fact, my loan officer had never written a loan without a Personal Guarantee attached.

OK, so what’s the trick to not paying one?  Insurance.

It seems so simple, I can’t believe I didn’t think of that myself.  Default insurance for small busiensses that protects the owner and pays the bank the outstanding balance of a loan.  What a great idea.

Maybe you already pay PMI — Private Mortgage Insurance — on your home loan.  Or maybe you signed up for some kind of “credit sheild” insurance on your credit card balance that pays in the event you lose your job.  This is the same idea.  If your company goes bust, the insurance company pays the bank.

So far I’ve only found one company that offers this.  I’m not affiliated with them in any way, but I think its such a neat idea, I’m happy to pass along their contact.  Asterisk Financial’s website allows you to read more about PGs and apply online for Personal Guarantee insurance.

Now I can’t wait to start my next company.  And sit in the chair.  And smile when I sign that Personal Guarantee.

Dedicated to your (insured) profits,

David