Four Important Tips to Have When Negotiating Personal Guarantee
If, by some change, you do manage to get a loan, you will notice they don’t have strict rules like you being asked to read and sign a personal guarantee form which will put your own assets like real estate, car/s, savings, and other valuables, at the lender’s hands should you fail to repay the loan. Most of the time, you find that businesses and business owners feel so relieved and overjoyed of getting a loan that they forget to read the fine print binding the loan. And you find that this is what usually puts them at risk.
But it is extremely vital that you read the fine print of the loan you are about to take, and even try to negotiate the terms of the agreement. Who knows, you may be lucky and find things like the interest rates being adjusted more in your favor. In most borrowing situations, you find that the lender is the person always in the driver’s seat, and it is what he/she says that is the law on the loan. But there are some occasions and tips that you can apply when negotiating personal guarantee agreements that can help you seize some control over the terms too. Here are some of them that you can try out and see how they work out for you and your business.
1. Spread the risk
There are times when you will find that all the owners of the business, and not just the primary owner, are needed to sign the personal guarantee forms of the lender. If your business has multiple investors, for example, who own at least 10% of the business each. The lender may require that all of them put their signatures on the personal guarantee form. This ensures that each of the investors should be liable for some portion of the loan and any risks incurred as well. But it is advisable that each person who puts his/her signature on the personal guarantee form only accounts for the risk of the equivalent amount to his/her percentage of the company’s investment. In this case, for example, each investor should only be liable for 10% of the debt should anything go wrong.
2. Shorten the time frame
Many personal guarantee forms are usually signed ‘unconditionally and forever’ and for the term of the loan, it is advisable that you, the borrower, try to negotiate with the lender on an end date for the loan. You can request, for example, that the terms set on the personal guarantee form only applies to a portion of the total time that you are given to repay the loan. You can also try and negotiate an end date on some provisions of the personal guarantee agreement.
3. Limit the amount of guarantee
As the borrower, you can also try and protect yourself by requesting to have only a percentage, or portion of the loan to be covered by the personal agreement. Say, for example, that you are borrowing $1 million. What you can do here is try and negotiate with the lender if it can be possible to have the personal guarantee to cover only 60% of the whole loan. This will protect your business from suffering the loss of the whole $1 million should the business default to pay back the full loan amount. At least your collateral and personal assets will be off the hook for the whole $1 million.
4. Beware of risking it all
Before you agree to sign the personal guarantee form, you need to, first, carve out some of your assets that the bank can seize like your home should you default to pay back the loan. Some states in the U.S. like Texas and Florida, have it in law that banks or any other lenders can’t seize your homestead if you default to pay back any loan. But if you live in a state where this is not law, then you need to ensure that you cover these assets and protect the assets that you can’t afford to risk.