The Personal Guarantee for Credit Approval

A personal guarantee (PG) is requested by lenders in order to ensure that they get paid any debt issued to a corporation or LLC. The personal guarantee is signed by an individual typically involved in the business. In most cases it’s one of the owners, officers, or board of directors.

The National Association of Credit Managers (NACM) publishes a monthly magazine for credit managers. The credit managers are the individuals creating the criteria for which an approval of credit will be determined. In several issues the editors and writers of the magazine tell the credit managers that getting a personal guarantee is vital to the credit decision process. According to the NACM, an individual not willing to provide a personal guarantee is someone who doesn’t believe in their business and not worth providing credit to; they are high risk.

Although from a credit grantors standpoint you want a personal guarantee, from a small-business owner’s stand point you don’t want to provide a personal guarantee if at all possible. As a small-business owner, you will almost always be asked for a PG when applying for credit under your corporation or LLC. The reason why is that the debts of a corporation or LLC are not the debts of the individual owners or officers of the company. This is part of the corporate veil of the entity. So credit grantors want to make sure they hold someone liable, individually, in case the company doesn’t pay.

There are ways to get around using a PG.

First, negotiate. Obviously the smaller the business granting the credit, the more likely they are to waive the PG. The larger the business, such as a bank, the less likely they are to waive the PG. I personally have negotiated with landlords of commercial office space, corporate vehicle leases and loans, and vendor credit where I had the personal guarantee clause removed. It wasn’t always my first choice of a building or vehicle, but I did get what I wanted without a PG.

The second thing you can do to stop using a PG is to find companies already willing to offer credit without it. In the last seven years at Business Credit Services, we have researched over 75,000 companies nationwide who grant credit and determined which ones require a PG and which ones don’t. We have also tracked which companies require a personal credit check or business credit check and which ones don’t. For members of the Business Credit Builder program, our coaching staff matches up the clients’ business and those on our vendor list. We provide a resource for finding companies that will issue their business credit.

Although I personally like to minimize the amount of times I personally guarantee debt in our business, I understand the need to use a PG from time to time in order to get the credit lines or loans I want and need. The key is to know when to use the PG and when not to. If you don’t have to use it, don’t.