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Susan, I heard you say at a small business event that you were not a fan of personal guarantees. I have a small revolving loan from a local bank. In three years, I’ve never been late on a payment and my business has only grown. So, how do I get rid of the personal guarantee? My husband is pushing me to deal with this (he heard you too).

Sometimes signing a personal guarantee is a necessary evil. In order to advance your company with added working capital, banks and commercial finance companies ask the founders and executive partners of a privately-held business to sign a personal guarantee.

Personal guarantees can be hidden in leasing agreements with landlords and equipment suppliers as well as funding agreements.

If your loan is backed by the Small Business Administration, then there is probably little you can do with your current lender. The SBA loan program has specific requirements with little wiggle room.

Another option is to pledge specific collateral to cover the loan. In addition to your company’s receivables, inventory or other assets, business owners can opt to put up a certificate of deposit or other financial collateral to cover the full value of the outstanding loan balance. But most business owners don’t like to tie up their personal assets in this way.

So what can you do?

The starting point to negotiating your way out of a personal guarantee is to first understand why they are requested.

Within commercial banks, loan officers are rewarded whenever they can boost a loan’s underlying security or “loan coverage”. Because banks don’t want to take over troubled businesses, they use personal guarantees as extra incentive for business owners to avoid bankruptcy and persevere through tough times.

Statistically, women tend to be more loyal to their financial vendors than men. They “trust” their bankers to give them the best deal. But, complacency is costly. Banks will not volunteer to lower your rates or eliminate guarantees; you have to negotiate aggressively for it.

Your argument for guarantee release is greatest if (i) sales are growing steadily – but not too fast; (ii) your debt-to-equity ratio continues to trend down; (iii) you are selling to “good quality” customers who pay on time; (iv) you have three years of sustained profitability; and (v) the bank believes you will jump to another bank.

Sometimes bankers may counter to requests to release a personal guarantee with a phased release over a period of time or promise to present your proposal “at the next credit committee meeting.” This approach is not likely to go anywhere.

Unfortunately, most business owners learn that they have to move to another bank to get better loan pricing terms. It is worth your time to network and introduce your company to competing banks. Ask other local business owners, lawyers and accountants for referrals or simply walk into a bank branch and ask to be introduced to a small business loan manager. Regional banks may be more flexible than large banks on small loan requests.

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