The Personal Guarantee for Credit Approval 6

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.

About the Author David Gass is a contributing author to www.bplans.com. Follow David on Google+. Read more »

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  • http://chaunceywhite.com Chauncey White

    Anyone and everyone wanting assistance with a startup or existing business needing assistance contact your local SBA office or get started now using the following link:
    http://www.sba.gov/smallbusinessplanner/index.html

  • http://MCZ MCZ

    I want to open a small grocery store. I have been doing research and have came up empty handed when trying to find a minority grant for start up. I contact the SBA and they do not issue grants only loans. Does anyone know of anyone that issues grants for business start ups>

  • Colin McColley

    I am starting a police and tactical gear store. I need funding. I recently got out of the military and I am now a civilian police officer. I have to travel nearly an hour to purchase any kind of police or tactical gear for my job. The owner of of the shop an hour away is amking a killikng because he is the only store within a 200 plus mile range. Every police agancy from Sheriffs to Border Patrol go there. I want to take some of that business off his hands.

  • Bill

    I and two of my employee’s. Would like to quit our job and start a private sports bar and grill offering day pass “and yearly” memberships. with rough projection of start up cost we’re looking at about 3.4 million. there is no doubt the money will roll in especially with location and tecnique of service. But where will we get the funding in the midle of Nebraska and how? With this ammount of investment can the PG be tossed out?

  • Michael Dennis

    I would like to get pointed in the right direction with small business grants and loans. I have been commercial cleaning franchising for about a year and would like to branch off and become my own independent company. Funding is signifigant inorder to purchase supplies, equipment, etc.. I have a vision and I’m serious about becoming successful!!!

  • glenda eason

    I would like to get information on funding for minority on business. I have a beauty salon. Need working capital, supplies, have some equipment but need improvement.