Before you go to the bank for small business financing, be ready for this.
The trickiest component to obtaining bank financing for a small business is weighing whether signing a personal guarantee is worth the upside.
These days, banks almost always ask for or require personal guarantees from small business owners, which eliminates several benefits of incorporating. Not only is it difficult to get a bank to provide financing without a personal guarantee, most small business owners either don’t want to sign off or don’t grasp the risks associated with it.
Signing a personal guarantee essentially posts all your personal assets as collateral in the event your business defaults on the loan. So if the business doesn’t have sufficient collateral to support the loan, then the bank looks at your personal assets as a backstop.
Of course, if the loan is for a piece of equipment or real estate that holds value — and the bank is comfortable repossessing to liquidate and get their money back — then you may avoid the issue.
Now, if the loan is for something like a line of credit secured by receivables or business assets, then the receivables’ creditworthiness and any debt obligations collateralized by the other assets becomes the next issue.
The ideal situation is for you to keep personal guarantees out of your business. Shopping for banks and making them compete for your account may be one way to get them to drop the requirement. Ultimately, however, if the collateral isn’t there, it’s unlikely you’ll get the loan.