Why Most Commercial Banks Insist on a Personal Guaranty

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By Tom Kirchmann

There are some very good reasons why most commercial banks require that a personal guaranty be included as part of a business loan.

With most business loans featuring the corporation as the sole borrower, a personal guaranty gives the bank the assurance that the principal(s) of the company have a vested personal interest in making sure the business performs so that the business is able to satisfactorily meet its loan obligations.

Secondly, the personal guaranty gives commercial banks an additional outlet for collection if needed.

Thirdly, the bank uses the personal financial standing of the guarantors in determining the credit-worthiness of the corporation. While this factor is not a primary consideration in granting a loan, it is certainly taken into account. After all, a borrower who handles his or her personal finances in a satisfactory manner is that much more likely to do the same in his or her business. Additionally, a borrower with a high tangible net worth and/or high liquidity is a strength that is taken into consideration when analyzing business credit.

As a business owner, is it possible to get your bank to waive the requirement of having to provide your personal guaranty? While there are exceptions to everything, it is very, very rare when a personal guaranty is not required. In many cases, just about the only time a commercial bank will waive the requirement is when the business itself is performing in such an outstanding manner that its cash flow overwhelmingly makes it easier for the bank to waive the requirement. Even in this exceptional case however, the bank would still prefer to obtain the guaranty of the principal(s) of the company.

On very, very rare occasions the requirement may also be waived when the business is so strong financially that the personal guaranty becomes a negotiating ploy for the business. In this case, the business has told the various banks competing for the loan that whichever bank waives the personal guaranty requirement will get their business. This tactic can work, but again in most cases the financial fundamentals of the business must be unusually strong.

The reasons why a borrower may wish to have the personal guaranty requirement waived by the bank are obvious: Once the borrower signs on the line, he or she is personally liable for the debts of the business. The fact remains however that personal guaranties are nearly always required by leading commercial banks.

Limited Guaranties

Contrary to popular belief, limited guaranties are rarely used by leading commercial banking institutions. A limited guaranty limits the dollar amount that the guarantor is liable for at a certain amount. In most cases, full guaranties are required, up to the amount of the loan.

Corporate Guaranties

Another type of guaranty is the corporate guaranty. In this case, a separate corporation run by the business owner is required to guaranty the borrowing company’s debt. This document is not as common as the personal guaranty. To give one example of its possible use, it may be required when the loan is being made to a new business and the established related entity is the one with greater financial reserves and more capacity to repay the loan if needed.

A personal guaranty often a part of doing business with leading commercial banks. The guaranty is there for good reason. A business owner should not take it personally when his or her bank makes this requirement, because as outlined in this article, the practice is more common than not.

You are welcome to share this report in its entirety and unedited. All links must remain intact. No information in this report should be interpreted as advice, as the report is meant for informational purposes only.

About the Author

Tom Kirchmann is the creator of the multimedia guide for business owners, “Business Financing Secrets,” where he reveals the exact steps to take to obtain favorable business loans and enjoy a rewarding relationship with your bank.

For now, the valuable report “The Preparation Principle” is still available for free. In the report, Tom shows you a fact not known to over 93% of business owners that can put you on extremely sound footing in your relationship with your bank.

To download your copy of this limited-time exclusive, click the link below:

Exclusive Report on Business Loans

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December 17 2007 08:20 pm | No More Debt

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