Negotiate Personal Guarantees Like a Pro

Strategies to help entrepreneurs negotiate bank personal guarantees with confidence

Q.  I own a profitable children's clothing design and distribution business. My bank loans (accounts receivable, inventory and letters of credit) are soon due for annual renewal. My banker has asked that my new husband also sign a personal guarantee. In eight years, I've been a perfect borrower. Is my banker's request excessive or unusual?

A.  Hmm, a commercial lender asking for more security on a loan! Unusual? Probably not. Excessive? If your business' financial position has only improved since the date of last loan agreement renewal, then yes, the request is excessive.

But don't worry. You have options.

First let's approach this unexpected event not as a problem but as a welcomed opportunity to fine tune your negotiating skills and improve the terms of your loan. You can accomplish this by understanding why the bank is asking for more protection and then countering each issue with facts.

Within commercial banks, loan officers are rewarded whenever they can boost a loan's underlying security or "loan coverage." Because banks don't want to take over troubled businesses, they use personal guarantees as extra incentive for business owners to avoid bankruptcy and persevere through tough times.

There may be some other reasons behind your lender's request. If you did not sign a prenuptial agreement specifically excluding your business from marital property, (highly recommended) then the business could fall into a costly ownership battle during a divorce. Bankers want no part of potentially messy business breakups.

Also, if you have gifted an ownership position in the business to your husband, the banker may in turn ask that all owners provide "joint and several" guarantees – meaning each owner may be responsible for the entire loan amount. Heavy handed? Absolutely! But from a banker's perspective, it never hurts to ask.

Statistically, women tend to be more loyal to their financial vendors than men. They trust their bankers to give them the best deal. But, complacency is costly. Banks will not volunteer to lower your rates or eliminate guarantees. You have to negotiate aggressively for it.

Your argument for guarantee release is greatest if (i) sales are growing steadily – but not too fast; (ii) your debt-to-equity ratio continues to trend down; (iii) you are selling to "good quality" customers who pay on time; (iv) you have three years of sustained profitability; and (v) the bank believes you will jump to another bank.

It is worth your time to network and introduce your company to competing banks. Ask other local business owners, lawyers and accountants for referrals or simply walk into a bank branch and ask for names and contact information for commercial loan managers who may specialize in the retail or wholesale garment industry.

When you do meet with your existing banker, highlight positive financial information about your business and comment if your husband has an independent income separate from your own. Then state with polite conviction that you will not provide additional loan coverage and after 8 years of favorable loan performance, you now expect a guarantee release! The banker may counter with a phased guarantee release over a period of time or a vague promise to present your proposal at the next credit committee meeting.

Unfortunately most businesses have to move to another bank to get better terms. But the best solution of all is to avoid signing guarantees to landlords, leasing companies and banks in the first place. Learn to just say no!

Take Command Action Step

Before getting married or moving in with a spouse, determine the implications of a relationship breakup on your business. As a starting point, find out if you live in a "community property" state or an "equitable distribution" state. It's worthwhile to learn how your personal life may affect business partnership agreements, personal guarantee documents, unpaid tax liabilities and more. You can do it!

Do you need time-saving tips to help fund and grow your business? Ask Susan How! Write to small business funding expert Susan Schreter at susan@takecommand.org