Getting a Business Loan Without a Personal Guarantee

Wish you could get a loan for your business without providing a personal guarantee? Join the club! Most business owners prefer not to put their personal assets on the line in this way. Banks, on the other hand, only want to lend when they’re 100% comfortable that they will be able to get their money back—and a personal guarantee helps provide that reassurance.

Although it can be next to impossible for new companies to get loans without personal guarantees, established companies sometimes can. From what I’ve seen, here’s what it takes:

• Longevity – Minimum of five years in business, but probably more than 10.

• Profitability – A track record of profitability and a demonstrated commitment to using these profits to grow the financial strength of your company.

• Strong balance sheet – Including:

• Quick Ratio (cash plus accounts receivables, divided by current liabilities) of 2:1 or better
• Debt to Equity Ratio of less than 1.0:1

• Collateral – This must be in excess of what you wish to borrow, with the bulk being liquid, such as cash or receivables. Lenders might also be interested in the real tangible value of inventory, machinery and equipment in a liquidation scenario.

• Ability to repay – Lenders want to see a realistic business forecast for the term of the loan showing that your business can easily meet the loan’s debt service requirements.

• Past loans – A history of satisfying past loan obligations in a timely manner, and remaining in full compliance with the loan covenants until the loans are repaid.

• Prompt accounts payables – Demonstrated history of paying your bills in a timely manner, as supported by consistent accounts payable aging with no past due balances.

• Strong management – A solid and consistent management team that doesn’t change from year to year.

• Long-term relationships – Banks want to see that you cultivate and value long-term business relationships, that you’re not changing banks, insurance brokers, CPAs or other professional service providers every year.

Finally, lenders want to know why you don’t want to provide the personal guarantee. After all, if you’re not comfortable providing this, why should they be comfortable putting their money into your business? A good first step might be to seek a reduced personal guarantee based upon mutually-agreed-upon metrics between you and the bank.

Need help getting your loan package ready?
Give me a call! As your part-time CFO, this is one of the many services I can provide.

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