After leaving public accounting, I went to work for a very wealthy family where bank guarantees were never signed.
I thought that was the norm until I started obtaining loans for my new client base when I started a consulting practice. While I have a 100% close rate on all loan packaging projects from the early 1990s, I’ve whiffed big time on convincing banks to waive client guarantees since 2001. If you want firm numbers, my success rate is 0%.
What gives? In this brief essay, I’ve asked one of my all-time favorite bankers to answer three simple questions on bank guarantees. His name is Tony Mayfield, and he’s the President of Community Lending in Columbia, Missouri at UMB Bank.
Advice Before Signing a Personal Guarantee
My first question for Tony was his advice for any borrower about signing a personal guarantee before obtaining a line of credit or term debt.
Tony Mayfield: A bank/lender wants to see if you, as an owner, are willing to stand personally behind your organization/business/or project. A personal guarantee is precisely what its name implies: that you, as an owner, are willing to guarantee repayment personally, and that gives a lender a lot of comfort in entering a lending relationship with any company. While not appealing to some owners, the willingness to provide a guarantee can speak volumes about the character and commitment of the owner(s) to repay the debt.
Alternatives to Personal Guarantees
Next, I wanted to find out if there are alternatives to personal guarantees. I was already aware of one option, but I wanted to see if Tony covered that option.
Tony Mayfield: Sometimes, a lender will replace a guarantee with additional collateral. This is called a “secured” guarantee, which provides additional repayment or collateral capacity to ensure the loan is repaid and directly tied to a specific project or lending relationship.
The Difficulty of Getting Out of a Personal Guarantee
In my second CFO position, I spent nearly four months on a project getting my employer out of a personal guarantee at Commerce Bank. Our co-guarantor was The New York Times. I succeeded, but that project took the wind out of my sails. My mind was shot for about a month after that project. Accordingly, I wanted to find out from Tony why guarantors have difficulty getting out of such an agreement with a bank.
Tony Mayfield: Removal of guarantees is reviewed on a case-by-case basis and can happen after a long history with the borrower has been established. However, most community banks started lending relationships with companies due to their relationship or knowledge of the owners, which is why releasing personal guarantees is difficult. This relationship (lender/owner) can grow over many years, and in some cases, the personal guarantees can be negotiated from a full guarantee to a partial or reduced percentage guarantee. However, any negotiation of a personal guarantee is contingent upon a long repayment history and the company’s financial strength.
Final Advice on Bank Guarantees
I used to view bank guarantees as the big, bad ugly wolves of financial capital. That’s not the case anymore.
Banks are not investors. They are lenders. If a loan goes wrong, they need assurances that they can be repaid. It’s that simple.
I’ll leave you with three vital pieces of advice regarding these agreements:
- Go into the lending relationship now, and you will be asked to sign a personal guarantee. Do not be offended. Exceptions will exist based on the collateral you are providing to the bank.
- Read the fine print in the personal guarantee agreement. A client recently renewed a large floor plan exceeding $50 million. He failed to read the agreement, and there was some very pro-bank language that could have been tamed for him and his partners. Even if you have an attorney to read and review the document, I want you to read it, too.
- If you have a professional money manager on your team, such as a VP of Finance, periodically review these agreements. As Tony stated earlier, these documents are not forever edged in stone.
Title Image Source: UMB