A personal guarantee (PG) is requested by lenders in order to ensure that they get paid any debt issued to a corporation or LLC. The personal guarantee is signed by an individual typically involved in the business. In most cases it’s one of the owners, officers, or board of directors.

The National Association of Credit Managers (NACM) publishes a monthly magazine for credit managers. The credit managers are the individuals creating the criteria for which an approval of credit will be determined. In several issues the editors and writers of the magazine tell the credit managers that getting a personal guarantee is vital to the credit decision process. According to the NACM, an individual not willing to provide a personal guarantee is someone who doesn’t believe in their business and not worth providing credit to; they are high risk.

Although from a credit grantors standpoint you want a personal guarantee, from a small-business owner’s stand point you don’t want to provide a personal guarantee if at all possible. As a small-business owner, you will almost always be asked for a PG when applying for credit under your corporation or LLC. The reason why is that the debts of a corporation or LLC are not the debts of the individual owners or officers of the company. This is part of the corporate veil of the entity. So credit grantors want to make sure they hold someone liable, individually, in case the company doesn’t pay.

There are ways to get around using a PG.

First, negotiate. Obviously the smaller the business granting the credit, the more likely they are to waive the PG. The larger the business, such as a bank, the less likely they are to waive the PG. I personally have negotiated with landlords of commercial office space, corporate vehicle leases and loans, and vendor credit where I had the personal guarantee clause removed. It wasn’t always my first choice of a building or vehicle, but I did get what I wanted without a PG.

The second thing you can do to stop using a PG is to find companies already willing to offer credit without it. In the last seven years at Business Credit Services, we have researched over 75,000 companies nationwide who grant credit and determined which ones require a PG and which ones don’t. We have also tracked which companies require a personal credit check or business credit check and which ones don’t. For members of the Business Credit Builder program, our coaching staff matches up the clients’ business and those on our vendor list. We provide a resource for finding companies that will issue their business credit.

Although I personally like to minimize the amount of times I personally guarantee debt in our business, I understand the need to use a PG from time to time in order to get the credit lines or loans I want and need. The key is to know when to use the PG and when not to. If you don’t have to use it, don’t.

Article provide by Business Credit Services, Inc.

I hate debt. I don’t like the feeling of owing anyone money. Though I was repeatedly taught in my youth to avoid debt like the plague, I didn’t listen very well — I was nearly $1m in debt at age 25! Some things are learned the hard way. As much as I dislike debt now, not all debt is created equal: there is both good and bad debt. Most of us have too much bad debt. I think it is fair to say that we can all use a little refresher in what constitutes good debt vs. bad debt.

Good debt
Good debt is debt on assets that are earning income for you at a rate greater than the cost (interest) on the debt. Large corporations use something called the hurdle rate to determine if an investment is worthwhile. The hurdle rate is simply the cost of capital. If the hurdle rate is 15%, then only investments or purchases bringing in more than 15% would be considered “good debt.” If you are using a credit card for “good debt,” you better have a great return!

In addition to positive returns, good debt includes anything you truly need but cannot pay for in full without wiping out your cash reserves. From a cash flow perspective, however, you should only take loans for which you can afford the monthly payments. Purchasing equipment for your business would be a wonderful example of this kind of debt. Most equipment pays for itself with the revenue it produces, so structuring a lease or financing program with manageable monthly payments is a wise usage of good debt.

Bad debt
In contrast to good debt, bad debt does not create an income greater than the interest of the debt. Bad debt also includes debt you’ve taken on for things you don’t need and can’t afford. Most of these purchases don’t just fail to produce a greater return than the interest expense, they produce no return at all! Some even produce a negative cash flow. Most importantly, bad debt doesn’t help you grow your business.

Your financial success in business and life will largely be determined by your ability to discern between good and bad debt. I’ve interacted with many business owners who have problems with bad debt, but I’ve met a lot who shun all debt. Both types of business owners are going to have limitations to what they can do with their business. Embrace good debt. It will give you the leverage you need to take your business to the next level.

Article provide by Business Credit Services, Inc.

In his book, The Seven Habits of Highly Effective People, Dr. Stephen Covey recounts a conversation with a man who hated attending out-of-town training events. The man explained that his wife calls and hounds him on every detail of the day, whom he dines with, etc., and that he felt imprisoned by it. He also volunteered to Dr. Covey that he met his wife at a similar event at the same time he was married to someone else. Dr. Covey then gave one of my favorite quotes as counsel to this man: “You can’t talk your way out of a problem that you behaved yourself into.”

This truism is extremely relevant for business owners who are trying to obtain capital for their business. I’ve chatted with business owners that want a couple million dollars, unsecured with no personal guarantees, no business plan, and personal credit in the 500s. As much as I want to help these people, the most valuable thing I can say to someone like this is to GET REAL! Your personal credit demonstrates your propensity to meet your financial obligations and is an indicator of how risky it is to do business with you.

Just because you have poor personal-credit doesn’t mean that you are a bad person; there are a lot of reasons why someone’s credit may have tanked. Nonetheless, your credit score is a fact that you have to deal with. Maybe you realize that this is a negative, and you need to take action to improve it – something that you need to behave your way out of. Successfully maintaining a good business credit score can demonstrate you are a good business risk.

Banks and investors make money by making safe bets. They are not in the business of handing out money to those who simply ask for it. You need to “behave” if you want to obtain capital for your business. You do that by building good personal and business credit, establishing a positive track record as an entrepreneur and running a professional business with not just a vision, but a plan for success.

Article provide by Business Credit Services, Inc.

Given your business plan and your collateral situation, you might look for special loans funded by government development agencies.

If you are in the U.S., then you are probably looking for Small Business Administration (SBA) loans. The SBA is a federal government agency that guarantees bank loans to small business. The SBA has many different programs, including a micro-loan program with less paperwork than normal for smaller loans, some special programs for women and minorities, and a loan guarantee program for small businesses.

You apply for an SBA loan at a local bank, not with the SBA. The SBA guarantees the loan but the local bank processes and funds it. Many people misunderstand the process.

If you aren’t in the U.S., then look to your local sources for investment financing and government-sponsored development agencies. In Mexico, for example, Nacional Financiera offers development funding. Many economies have similar facilities for stimulating small business and economic development.

Additional information

• Go straight to the source at the SBA website. This is one of the most useful government websites around, a wealth of information.
• Independent community banks.
• Radio talk show discussions of the SBA at the Small Business Advocate website.