How to Guarantee a Business Loan
Small businesses historically have had a high failure rate, and consequently lenders typically require business owners to act as personal guarantors for small-business loans. The guarantors, by definition, guarantee the loan in the event that the business entity becomes insolvent or otherwise unable to repay the debt. Generally, banks require anyone with a 20-percent ownership stake in the business to sign as a guarantor on any business loans.
- Difficulty:
- Moderate
Instructions
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1
Prepare a personal financial statement that lists your personal assets, such as residential real estate, cash and securities as well as your personal liabilities, such as your mortgage, car payment and credit card debts. Locate your last two years of personal tax returns and 60 days of personal bank statements and investment account statements. Tell any other business owners intending to act as guarantors on the loan to gather the same information relating to their own financial affairs.
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2
Print out the articles of incorporation, fictitious name certificate, general partnership agreement, business license or any other type of documentation used to register your business with the state. Locate copies of the business' tax returns for the prior two years. Prepare financial statement that lists the business' assets and liabilities and also print out 60 days of bank statements for the business' accounts.
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3
Go to the bank, and meet with the business banking officer. Provide the banking officer with the personal and business information that you gathered. Also, provide the officer with your personal information, including your Social Security number, physical address and contact information.
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4
Complete a business loan application. You and anyone else acting as a guarantor on the loan must sign the application, and one of you also must sign as the authorized signer on behalf of the actual business entity. Give the completed application to the business banker and if applicable, arrange an appraisal of any collateral you intend to use to secure the loan.
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5
Attend the loan closing along with the other loan guarantors. Every guarantor must sign the loan agreement. The banker should provide each signer with a copy of the loan agreement.
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1
Tips & Warnings
Aside from personal guarantees provided by business owners, some banks also obtain business loan guarantees from the federal government. The United States Small Business Administration (SBA) guarantees loans for businesses that are otherwise unable to obtain financing. While the SBA and other state agencies guarantee a portion of some loans, business owners acting as guarantors are responsible for guaranteeing the entire loan amount.
When you act as the guarantor, the bank can decline the loan on the basis of your credit score or lack of income. Banks only accept guarantors who have the financial strength to pay the loan off in the event that the business fails to do so. However, since all 20 percent owners must act as guarantors, one owner having bad credit could prevent the business from obtaining a loan.
