Is requiring entrepreneurs to sign personal guarantees when they take out business loans a new practice?
Personal guarantees have been around for years, but you had more flexibility in the past to negotiate around that demand, because there was some consideration given to the reserves of the company and how long they’d had a relationship with the bank. But today, with banks getting much stricter [about] underwriting during the credit crisis, the demand for collateral support has gone up, and the reality is that most banks won’t give loans without a personal guarantee. If the business has strong financials, and the owner believes in it, is the personal guarantee so bad? A personal guarantee is a promissory note that gives the bank the right to go after the borrower’s personal assets if there’s a default. It’s considered very onerous. Business owners go in to take out a business loan, the bank demands that they put up all their business assets, and then their personal assets as well. If the business fails, that’s traumatic enough, but then they go after the owner’s house, his cars, his bank
