13 Pro Tips To Avoid Giving A Personal Guarantee For Any Business Deal

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One of the most nerve-wracking aspects of owning your own business is the potential danger of losing your house or personal belongings if things don't work out.

The smartest way to avoid this is to set up your business in a way that means you're not on the hook for its debts.

The first step to achieving this is to create your business under a limited liability structure like a corporation, an LLC, LLP, or a PLC. The exact structure depends on where you're located.

However, even when you protect your personal assets using one of these structures, often lenders or suppliers will still ask you to provide a personal guarantee when you want to work with them.

So, the question is, how can you talk your way out of this when someone asks you to provide a personal guarantee?

?? Just say no.

Most banks and institutional lenders will ask for a personal guarantee just as a matter of protocol. It's not always that they necessarily care, it's just a box they need to check.

When they ask, just tell them that you're not willing to do that. Many times, the bank, lender, or creditor will just say fine and move on.

Congratulations! ??

You just avoided personal liability with a single word, no.

Not a reader? Not a problem. Listen instead. ??

Check out the?Spotify?podcast episode below, where I highlight the same 16 profit-maximizing strategies that I do in this article. ??

What to do when creditors insist on a personal guaranty.

If that tactic doesn't work, and sometimes it won't, then you need some additional high-level tactics to work your way around the personal guarantee ask.

13 Pro Tips To Avoid Giving A Personal Guarantee For Any Business Deal

? 1. Keep your lender informed by sending them weekly updates on your business finances.

When you're willing to be open about your business operations and financial situation, your lender may feel more comfortable moving forward without the need for a personal guarantee. They can keep an eye on the business's credit risk and won't be caught off guard if things start going downhill.

This is especially helpful when you're dealing with a credit arrangement where the credit limit can change or be renewed.

? 2. A more involved method is to give your lender 'read-only' access to your financial accounting software.

This might feel like the lender is prying into your business, but it allows them to constantly see the financial status of your business. They can ask questions if anything looks unusual or concerning.

? 3. Use a Cross-Collateral offset.

This means promising collateral that is separate from, or in addition to, the business's assets, without a personal guarantee.

If you own valuable assets, you can promise one or more of these, limiting your liability to the value of those assets without any additional or unlimited personal liability.

? 4. Increase the interest rate.

You can offset the credit risk to the lender by increasing the interest rate you're willing to pay on the loan without a personal guarantee.

Oftentimes, by offering a higher rate of interest, you make the creditor more comfortable with risk because they're getting a higher return on their investment.

? 5. Pay weekly instead of monthly.

This way, if your business starts having money problems, the lender will see it sooner, reducing their risk.

? 6. Buy credit insurance on your customers.

This helps make sure your key liquid assets, like accounts receivable or purchase orders, are more secure.

? 7. Offer a Fidelity Certificate.

This would only require a personal guaranty if you commit fraud as defined in your purchase or loan agreement, protecting the lender from fraud risk, but not the overall business risk.

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? 8. Promise specific assets as security.

You can give the lender the first claim to certain assets like domain names, accounts receivable, purchase orders, or equipment. This reduces their risk because if the business fails, they can claim these assets.

? 9. Offer the lender redeemable warrants coupled with a call option.

Sometimes, lenders are more open to riskier loans without personal guarantees if the borrowers offer them a chance to get a small stake in the company they're lending to. When these options to buy come from the company, they're called 'warrants'.

You could propose giving your lender warrants in a company that's specifically created to acquire the assets of the target company.

The 'call option' allows you to buy the creditor out of the warrants at a pre-determined price or pricing formula within X period of time after making the loan.

It's important when setting up this kind of agreement that you give yourself enough time to pay the price when you decide to use your call option. It's usually best to build an installment purchase payment plan into your deal at the beginning, which is not uncommon in the startup world.

? 10. Offer Redeemable Warrants coupled with cross-put/call options.

This is the same as above, but provides an out option to the creditor in the form of a 'put,' so they can force you to buy them out of their warrants at a predetermined price or pricing formula after a certain period of time.?

If you choose this path, then be sure to provide yourself with enough time to fund your deal before the lender can trigger the put option.?

The loan won’t do you a lot of good if immediately after they make it they can force you to buy them out!

Similarly, think about structuring your deal so that any lender-activated option payments can be paid out by you over an acceptable period of time.

This is fundamentally a predetermined payment sweetener to induce them to make the loan without a personal guarantee.

? 11. Offer the lender a deal participation agreement.

Sweeten the deal by offering your creditor the ability to participate in it on some level.?This could be as a percentage of profit, a percentage of profit with a cap on dollars, first priority participation so they get the first $X of profit in the deal, or a priority participation with a cap.

Again, you're compensating them for the risk of no personal guarantee requirement by offering more upside in the deal.

? 12. Offer them self-funded liquidation insurance.

In this method, you give the lender a limited stake in your current business. This means they can receive a portion of your profits up to a certain dollar amount or a percentage to cover any failure to meet your credit obligations.

Basically, you're promising to cover any losses if you can't pay them back by giving them a stake in your other business's profits. This stake could either be a priority (first claim) or non-priority (after other claims) and can be up to a certain dollar amount, percentage, or for a specific time period (like per week, per month, per quarter, or per year).

This could be capped at a certain amount of money or a particular profit percentage for a set period, or it could continue until you've fully paid off the missed payments.

? 13. Add one or more performance-based personal guarantee triggers.

In this case, you start out with no personal guarantee. But in the event of certain conditions happening, a personal guarantee would then be triggered.

The condition could be a financial statement based on a debt-to-equity ratio or quick ratio covenant that says the ratio will not fall below a certain amount for example.

The trigger could also be a condition that may be in your control (like you dramatically increase debt, or you pay yourself a large salary despite declining profits and cash balances, or your payroll increases to more than 20% of net sales).

Or, it could be a condition that is out of your control, (like you lose a major customer) or some other condition that initially made the deal appealing and less risky for the lender subsequently goes away (like you lose X% of favorable Google rankings or a precipitous decline in some leading indicator, like the number of leads generated per week, appointments set per month, etc).

In the event the triggering condition occurs, the creditor’s risk increases, so a personal guarantee would be triggered.?

That personal guarantee could be limited with a cap, and your agreement could also provide that the personal guarantee would go away again once the triggering issue is favorably resolved.

Likewise, you could have a notice provision that provides that the personal guarantee is triggered only when a specified condition or conditions happen AND the creditor gives written notice of its intent to trigger the personal guarantee.

An additional provision could specify a cure period for the personal guarantee trigger as well. In this case, you would be allowed a period of X days to cure any personal guarantee trigger condition, and as long as you fixed it within the time period the personal guarantee never even triggers. This recognizes that the only reason to require a personal guarantee is to reduce risk.?

I hope you find these pro tips helpful when negotiating funding for your next business acquisition, or any time you're raising money for your business.

About the author

Brian Webb is a 21-year entrepreneur, private investor, business & profit growth mentor, a B2B marketer, and the host of the?Business Growth Show?podcast.

In addition to managing a growing portfolio of businesses, Brian is the CEO of the award-winning marketing and business growth consulting agency in The Woodlands, Texas (Greater Houston Metroplex), Whatbox Digital, LLC.

You can find Brian on?Apple,?Google,?Spotify,?Pandora,?iHeart Radio,?and?Amazon. Brian’s writings have been published by?NBC,?CBS,?and?FOX,?and he's been recently?approved as a?Forbes?business council member and content contributor.

You may also recognize some of Brian’s anchor clients like?Coca-Cola, Comcast,?Coldwell Banker,?Entrepreneur’s Organization,?Hospital Corp of America,?and?Karbach Brewing, to name a few.?

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