Once the value of the business is estimated, your client should consider the amount of personal assets they can risk on the loan, including their equity in the business. What is an acceptable amount to gamble? The answer may be nothing; but whatever the number, it should be figured into the initial loan negotiation. The basic equation should be:
Liquidation Value of the Business + Acceptable Personal Risk > Personal Guarantee
Negotiate the terms of the guarantee. While nearly every term in the PG can be negotiated, it is important to help your client determine the points most critical to them, as well as those the lender is most sensitive to changing. Knowing this, you’ll be in a better position to help them shape their PG negotiating strategy. Possible avenues to consider include:
• Limit the guarantee: While banks will always want an unconditional or unlimited guarantee, the client should ask that the amount be limited either by the actual dollar amount or by a percent of the outstanding loan. If there are multiple owners, they could also seek to limit the amount of exposure by the percent ownership for each partner.
• Suggest terms of relief: For instance, they can ask to be relieved of the PG after a certain percent of the loan has been repaid.
• Modify the reporting requirements: Lenders typically require guarantors to submit personal financial information at least annually. Generally, your client should avoid filling out the standard boilerplate personal financial information for a loan. This is a roadmap for the bank to find and request their personal assets. As an alternative, help them draft a personal financial statement that contains the minimum acceptable disclosure — there is no advantage to providing more information.
Their first PG negotiation shouldn’t be their last – As your client’s personal and business conditions continue to evolve, they should approach the lender to discuss the terms and conditions of both the loan and the PG as circumstances may have become more favorable to them (improved financial performance, increased collateral, etc.).
Personal Guarantee Insurance can provide much needed risk reduction and peace of mind. It’s a unique product designed to address the risk of a PG being called, covering a substantial portion of what is owed after a business liquidation.
Conclusion
It may be impossible, given the current economic climate, for your SMB clients to completely avoid a PG. However, they do have options. Armed with good advisors and a carefully planned approach, they can confidently negotiate the terms of their PG and loan together in pursuit of the best deal possible.
James R. Coughlin is chief underwriting officer for Asterisk Financial Inc. He can be reached at [email protected].