Here is a myth: incorporate your company and it will protect your personal assets when you borrow money. But in the real world you will be required to personally guarantee repayment of your loan. Moreover, you could lose everything you own, if you don’t make your payments.
“There was one time where things were pretty bad,” an owner of a small manufacturing business told the audience at the “Personal Guarantee 101” webinar, last week. “And they were bad enough where I had to sit down and talk to my wife about it.” He was concerned that the bank would grab business and personal assets when his company had difficulty making its loan payments.
BoeFly LLC presented the webinar. “Boefly is the online marketplace that connects business owners seeking financing with a network of more than 2,200 lenders,” David Nayor, the company’s co-president told the attendees. In addition to BoeFly’s lender members, it has “more than 125 franchise brand (members) from all sectors.” The franchise brands refer their franchisees to BoeFly’s matchmaking portal to obtain financing.
Beth Solomon, the International Franchise Association’s vice president opened the webinar. She e-mailed me after the webinar, “In a difficult credit market, it is vital for borrowers to know as much as possible about loan products and what’s necessary to secure financing.”
IFA and BoeFly are strategic alliance partners and developed the IFA/BoeFly Franchise Lending Index. “BoeFly’s ongoing effort to offer information and insight into franchise lending, for franchise brands, current and future franchise business owners, and the finance community, is one of the greatest assets the industry has,” Solomon said.
Panelist Casper Zublin, the above-mentioned manufacturer, told the audience about his angst from signing personal guarantees (PGs). The chief executive of IRP said, “I can tell you I’ve lost a lot of sleepless nights over PGs.” It was during a time when his business hit a rough spot. “Candidly, that was probably one of the worst days of my life.” He told his wife, “If things continued in this direction that we would lose everything.”
Nayor asked Jon Cosentino, a professional loan broker, general manager of Commercial Capital Training Group and a former banker to comment. “A lender will attempt to go after the assets of the borrowing entity prior to pursuing the personal guarantor’s assets,” Cosentino said. “If there’s a shortfall after liquidation of those assets, then the personal guarantor’s assets may be liquidated, and those can include, unfortunately, one’s home in some states, savings, whatever other assets you may have. ”
Nayor called upon Randy Evans, an attorney with Monroe, Moxness, and Berg to tell the audience the legal consequences of personal guarantees when a borrower defaults on a loan. “I have not really encountered that many situations where the lender actually has called a guarantee or has litigated a guarantee,” Evans said. “I think most personal guarantees are really for what I call behavior modification purposes more so, than for actual financial recovery from the guarantor.”
In other words, lenders want their borrowers to have meaningful personal assets at stake if they don’t do everything possible to keep their businesses afloat when the going gets tough. “If you don’t have skin in the game and there’s really nothing to lose,” Evans said. “What the lender is afraid of is that you’re just going to toss them the keys and walk away.”
Evans also talked about methods of reducing the amount of personal guarantee by pledging additional collateral, posting a bank letter of credit or negotiating guarantee amount burn-off provisions based upon the company’s financial performance at some later date. “Personal guarantee insurance,” he added, “while not an alternative to the guarantee obviously, is a way to minimize the risk. ”
With that segue, Nayor asked James Coughlin, chief underwriting officer with Asterisk Financial to speak about his company’s personal guarantee insurance program. “Personal guarantee insurance was developed specifically to address that anxiety or worry that business owners have and that the lender will pursue them for deficiencies,” Coughlin said. To avoid catastrophic loss, Coughlin said, business owners can buy 30 percent to 70 percent insurance. “So on a million dollar loan, if you sign up for 50 percent guarantee, you’re only on the hook for 500,000. ”
Nayor ended the formal presentations by the panelists and asked for questions from the audience.
Personal guarantees and the risk of failure gives prospective entrepreneurs a reason to think twice about going out on their own. Others are willing to accept the risk when they are given enough facts. The purpose of BoeFly’s “Personal Guarantee 101” was to present the facts and discuss several alternatives to mitigate some of the risk.
The entire Personal Guarantee 101 webinar, including the question and answer session is available online for those that that could not attend. It will be of interest to entrepreneurs, franchise industry practitioners and vendors who supply, consult, coach, mentor and serve small and medium-sized, privately-held businesses. While you are at the BoeFly.com site, please be encouraged to read how borrowers, lenders and franchises benefited from our unique matchmaking platform. Also try our free fundability app to learn how many of BoeFly’s lenders may be interested in financing your business. You can also chat with one of BoeFly’s financing professionals about your situation.
The entire Personal Guarantee 101 webinar, including the question and answer session is available online for those that that could not attend. It will be of interest to entrepreneurs, franchise industry practitioners and vendors who supply, consult, coach, mentor and serve small and medium-sized, privately-held businesses. While you are at the BoeFly.com site, please be encouraged to read how borrowers, lenders and franchises benefited from our unique matchmaking platform. Also try their free fundability app to learn how many of BoeFly’s lenders may be interested in financing your business. You can also chat with one of BoeFly’s financing professionals about your situation.
Jerry Chautin is a former entrepreneur, commercial mortgage banker and business lender. He writes and blogs about business and real estate for several publications and is SBA’s 2006 national “Journalist of the Year.” Jerry is a volunteer business mentor with SCORE, “Mentors to America’s Small Business,” offering free business advice. Post your comments and ask questions on this Blog or send Jerry an e-mail.