29 Jul The Value of a Personal Guaranty

Another installment of “Adventures in Entrepreneurism” brought to you by Pasadena Private Lending President Mike McAdams

Guaranty: guar·an·ty – an undertaking to answer for the payment of a debt or the performance of a duty

Many lenders require a Personal Guaranty or “PG” from borrowers for a variety of reasons. Pasadena Private Lending is one of those lenders. This article seeks to make a distinction between why traditional lenders use PGs and how PPL sees PGs as critical to truly creative lending to entrepreneurs.

Most traditional lenders require a PG out of a so-called abundance of caution. That is, they seek to make sure the “feet of a corporate borrower’s owner/manager are held to the fire” so that if a problem occurs with the loan, the lender knows the guarantor is personally vested in making sure the loan is paid back one way or another. In reality, many such guarantors have all their assets (let alone their income, social standing, and self-respect) tied up in their companies.

While they clearly care about paying back the loan, doing so out of their personal net worth tied up in the company the lender is already seeking payment from, in reality, may offer little additional comfort to the lender. That is, some lenders require personal guaranties knowing they offer little ultimate help in collecting a loan.

Nevertheless, if a borrower does have “excess” net worth, should the business loan go bad, having the PG can be important to the lender’s lending decision in addition to having double confirmed everything about the loan, knowing the collateral, the business’ cashflow, customers, and all the company numbers and documents.

At PPL, business financial info is also important but so are PGs. In fact, they are essential to our credit decisions as we must have a PG from each of our borrowing clients. But the reasons are more complex… and honest.

Of course we like to be paid back in full on time. As such, we look for substantial “outside net worth” with our guarantors. That is, we are looking for borrowers whose personal financial statement is substantial enough that they could write us a check for the loan amount if the business had a hard time making its payments. That may sound excessive; however, we have chosen to be in the business of lending to successful entrepreneurs… that is, business owners who have already shown their ability to succeed at least once before (as we choose not to finance start-up ventures). And to us, success means they have dealt with the inevitable problems of running a business and made money. That success affords them the ability to aid in supporting a second or a third business, if necessary.

I should point out two important additional factors for prospective clients to understand. First, the comfort of experienced and high net worth borrowers providing PPL with loan guarantees loans across our portfolio allows us to raise capital more cheaply and therefore extend our loans at a lower cost than other non-bank private lenders. And second, having a strong PG enables PPL to avoid many time-consuming, paperwork-intensive and administratively constraining rules traditional lenders might require. For instance, we can decide to not require new appraisals, not require audited financials, or allow use of loan proceeds to buy out partners or to pay large dividends.

Yes, PPL takes PGs seriously, as should our prospective clients. On the other hand, should prospective clients control successful businesses needing additional senior debt capital where they have substantial but illiquid assets, they may find PPL’s ability to lend to their business as an attractive, flexible, and cost-effective alternative capital solution. If you or someone you know could benefit on timely opportunities thanks to our bespoke solutions, we would welcome the introduction.