Can a personal guarantee on a business line of credit be avoided?
As a business owner starting and growing a business you will find that almost everyone you work with on a lease, loan or line of credit is going to ask for a personal guarantee. At least they should. Think about it from the creditor's point of view: "If I can get the business to guarantee to pay me back and someone individually, the likelihood I'm getting paid is much greater." Makes sense.
As a small business owner you may not want to provide personal guarantees because you don't want to be on the hook for the debt in case something happens to your business. You want to separate the business life from your personal life. However, creditors are always going to ask. So what do you do?
You will find that in order to obtain credit from anyone without a personal guarantee there is one thing that your business has to have in order to get approved on its own, that is to be in compliance with the lending markets. Compliance is a critical step that must be taken for your business in order to even think about not providing a personal guarantee.
Not being in compliance with the credit market can raise red flags with both credit bureaus and grantors. The red flags include such simple things as not having a business license or a phone line. Most businesses will not grant credit to another business that hasn't taken the steps to set the company up with the proper licenses and local, state and federal requirements.
The second thing you can do is to negotiate. You need to be willing to negotiate and willing to walk away from a deal.
Bottom line, if you don't want to provide a personal guarantee there are circumstances where you can avoid them. There are some circumstances however where they are required, and you have no way of avoiding them. So pick your battles of when you should and shouldn't provide a personal guarantee. There are times when it's necessary and other times when its not. Determine how important the loan, line or lease is to your business, then you can decide if a personal guarantee is required.
David Gass, President & Founder
Business Credit Services, Inc.