Small Business Today Magazine JAN 2015 AIM GLOBAL LOGISTICS | Page 33
EDITORIALFEATURE
When to Add a Personal Guarantor to a
Small Business Loan Application
By Bruce Hurta
W
henever I explain the SBA and
small business loan application
process, I like to remind listeners
that every small business loan
application is evaluated according to five
basic criteria and each loan application exhibits strengths and weaknesses that must
be evaluated in the underwriting and loan
approval process.
The five criteria being evaluated include:
1. Personal investment by the loan applicant compared to the amount of debt
being requested.
2. Cash flow and repayment ability of
the applicant for the proposed loan
amount.
3. Business ownership and management
credentials of the applicant.
4. Credit history of the applicant with
other lenders.
5. Collateral offered for the loan in case
of inability to continue making payments on the loan.
A good reason for a small business owner to think he can find a compatible lender would be if all five criteria have strong
characteristics which can be documented
by the lender. The world, however, is not
perfect, and neither are most business loan
applications.
How, then, can a small business owner obtain
the necessary credit to grow their business?
What if the business took on too much
credit card debt because it could not
borrow sufficient capital from traditional
resources to take advantage of growth
opportunities? What if they have wonderful prospects to take on new customers
but they don’t have enough of their own
investment to be matched in a favorable
debt-to-equity percentage by the lend-
er? What if the owner(s) and the business
do not have assets which make good business loan collateral? How about a business with unproven management and very
little track record to demonstrate successful business results? These are not reasons
to give up. The reason is that any of the
five criteria displaying weakness can be
offset by other criteria displaying offsetting
strengths. This is where a personal guarantor on the loan might be one resource
for strengthening the small business loan
application.
Who is the ideal business loan guarantor
prospect?
Oftentimes, small business owners turn
to friends and family for assistance. A
family member with a solid, personal financial statement and an excellent credit
history might be a prospect to personally
guarantee the loan and strengthen the
loan application. This could be because
they are older, wiser, more experienced,
and/or have just had the chance to accumulate more personal wealth. Statistically speaking, this type of individual has
more to lose from defaulting on a loan
and they are much less likely to do so
because they have reserves for financial
emergencies. An even better loan guarantor prospect is a person who has business expertise that is unique to the loan
applicant’s industry. They are not just
guaranteeing the loan because they are
a friend or family member with financial
means but they are supporting the business because they understand its potential and they can offer expertise to help
make sure it is successful.
With all things considered, a business
loan personal guarantor could have the
qualifications to enhance a weakness in
any one of the five areas of underwriting
analysis for the small business loan application. Poor historical business cash flow
could be offset by the personal guarantor’s other sources of income. Inadequate
personal credit scores of primary owners
could be compensated for with exemplary credit of a personal guarantor. Sometimes, a personal guara