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Berkonomics

Personal Guarantees are a fact of life for many entrepreneurs.

Starting and running a small or growing business can be a challenge to the most confident and optimistic entrepreneur.  And the process of borrowing money or financing asset purchases can be an eye-opener for those who are not used to today’s lender and seller aversion to granting easy credit.

Most any entrepreneur with a clean credit record can obtain a bank card with a $50,000 limit, if s/he is willing to give a personal guarantee and has enough assets to back the promise it contains.  As the amounts get higher or as banks get into the picture, the negotiation around a personal guarantee becomes more of an issue with the lender and the entrepreneur.  As a rule of thumb, a company with a majority owner in control will be required to provide such a guarantee for most any borrowing of significant size in relation to assets.

But what happens when the entrepreneur has taken investments from one or more outside investors and may not even own a simple majority of the company’s stock?  [Email readers, continue here…]  To most lenders, the guarantee is still a requirement, putting the entrepreneur in a position of additional risk that is not spread among the shareholders.

At least one company has entered the market providing personal guarantee insurance to bridge this important and uncomfortable gap between risk and comfort.  For a fee, insurance can be purchased that will back up most or all of the guarantee in the event of a default, allowing the risk to be mitigated with cash. Since this is a new area for insurance coverage, there is much interest but little experience to create actuarial tables for the insurer or stories to tell for candidate customers.  But the very idea is one worth investigating if the problem is one you face.

All entrepreneurs assume risk when starting and growing a business.  It is only smart to consider ways to mitigate risks when opportunities to do so arise.

  • Tom

    I’ve founded two startups that both got venture funding.

    I had problems with both as a personal guarantor.

    Nice article!

  • Frank Singer

    Dave,
    I’ve got a good one on this. My partners and I signed a personal guarantee (IFR Avionics) twenty years ago for a $250,000 line of credit. The line included a business credit card with a $5,000 limit. I didn’t want the company to have credit cards so I cut mine up. Within a few months we changed banks and canceled the line which we actually never used.

    I sold the company five years ago. The new owners of the company found one of the credit cards (I didn’t realize the bank sent two cards) and started to use it running it up over $35,000. When the bank (Wells Fargo) couldn’t collect they sold the debt to a collection agency. The collection agency tried unsuccessfully to collect from the company. They found the twenty year old personal guarantees so they also sued the three of us who signed the original twenty year old guarantee as well as dinging our credit.

    So far we have spent $10,000 on legal fees and it gets worse. I happen to have a home equity line with, yes you guessed it, Wells Fargo. I haven’t used the line which has been in place for thirty years and rarely used. The line is for $250,000 backed by a home worth ten to twenty times as much with no mortgage. Yep, Wells Fargo cancelled the line because they said “my financial condition” changed.

  • Jeff Strider

    David:

    This is an interesting post. Can you please provide the name of the insurance company providing this product and the name of the product per the insurer’s marketing literature.
    Thanks in advance
    Jeff Strider
    Member – Delaware Crossing Investor Group, Mid-Atlantic Angel Group Fund II, Robin Hood Ventures

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