Author: Brian Ellingsworth

Getting ROI on Your Personal Guarantee

ROI, or return on investment, is a term that you may hear often. However, many have never considered it in terms of a personal guarantee (PG). Yet, if you think about it, giving a guarantee on a loan is an investment of sorts. According to Dictionary.com, the definition of investment is “the action or process of investing money for profit or material result.”

With a personal guarantee, you are putting your assets on the line as a way to get funding for your business in hopes of helping it survive and thrive. Since your guarantee is an investment in your business, and all investment involves risk, the question then becomes how do you minimize risk and increase ROI.

Why Take the Risk at All?

When small business owners are looking for a business loan, often banks will ask for personal guarantees. In particular, when a business does not have an extensive credit history, a lender’s risk is higher. As a result, the lender will require a guarantee to mitigate their own risk.

However, no company owner can give a guarantee for everything. It’s not practical. All of your personal credit would be tied up.  Your personal credit score could plummet. You have to find the balance between when it is worth it to give a guarantee and when you should pursue another option. Understanding the potential return on investment (ROI) for your PG is vital to knowing if it is worth it, or not.

What Makes the Risk Worth It?

There are a few things that make the investment of a PG worth the risk. The first is, if you need immediate funding for your company and you cannot get it any other way. If it’s a choice between giving a guarantee or not getting the funds you need, it may be worth it to give a guarantee.

That is, assuming that the chances are high that the funds you get will have the desired effect of helping your business grow and thrive. Then it will be a good ROI on your personal guarantee.

It may also be worth it if the guarantee will significantly decrease the interest rate on the loan. Decreasing interest expense means you get the funds at a lower cost, which results in a higher ROI.

When are Personal Guarantees Not Worth It?

For business owners, it has to all be about value. Lenders will take a personal guarantee every chance they can get. Yet, it puts an owner’s personal assets on the line. In small business lending, this means lenders can legally claim whatever is pledged to secure the loan agreement. Consequently, you have to determine if the ROI on your guarantee is worth the potential cost.

If your business fails, then your personal assets will go to the lender. Unless your personal finances are infinite, you probably don’t have a lot of assets that are sufficient for a PG.

After real property, what other assets do you really have? Investments might work. But then, of course, you can lose them if your business defaults. If a small business owner is relying on a certain asset for something specific, like retirement financing, it could spell disaster. The risk, for a lot of owners, is too great. You could lose it all. That is not an acceptable ROI.

However, if you feel that the funds will help you to grow your business substantially and the risk to your personal assets is low, you may have an ROI that is acceptable to you.

What are the Risks of Defaulting on a Business Loan?

For newer businesses, the chance of failure is about 20% in the first year. It’s about a 50-50 chance a business will survive to see its fifth year.

This is why small business loans are a big risk for lenders. A lender asks for a personal guarantee to give the owners a greater stake in the company’s success. When a small business loan could cost an owner his or her future, then there’s more incentive to work toward company success.

That is where the ROI for the lender comes in. They get the loan funds back plus interest. But what about the owner? What owner isn’t going to work for business success regardless, whether their personal assets are on the line or not?

As an owner of a business, you have to know when it is necessary to give a guarantee. Then, you have to know when there is another choice and how to walk that path.

When do Small Business Owners Have to Provide a Personal Guarantee for a Business Loan?

There are a few times when a company owner has no option but to give a guarantee.

SBA Loans

SBA loans will always require a personal guarantee for loans over a certain amount. The Small Business Administration requires guarantees even from owners of well-established businesses. Furthermore, it will want them from all business partners.

This is in addition to all the other things the SBA wants to accompany a loan application. They require collateral, a business plan, a business proposal, possibly accounts receivable, and other financial statements.

That’s not to say an SBA loan is bad. There are other factors which make SBA loans worthwhile. Interest rates tend to be lower for one thing. That means the money you get costs less.

That is the definition of ROI on personal guarantees. If you get more money for less cost, and the benefits to your business are worth it, you have an acceptable ROI on your personal guarantee.

Term Loans from Traditional Lenders

Traditional lenders are likely to ask for personal guarantees regardless of whether you are applying for SBA loans or other traditional loans. They want a small business owner to repay any debt, and this is how they hedge that bet. So, for any small business loan you apply for with a traditional lender, you are likely to have to provide a guarantee.

Your goal, as the business owner, is to reduce the number of loans you need that require a guarantee overall. Then, of those that do require one, figure out how to reduce the amount of the guarantee required.

How to Reduce The Necessity for a Guarantee

SBA loans and traditional loans almost always require personal guarantees. So, the first way to reduce the number of guarantees you have to give is to use other types of business credit.

That means vendor credit and business credit cards. To do this in a way that reduces personal guarantees, you have to separate your business from yourself. That requires a Fundable™ Foundation.

A Fundable™ Foundation requires:

  • Separate contact information
  • An EIN
  • Incorporating
  • A separate, dedicated business bank account
  • A professional business website and email address with the same URL

Once you are set up this way, you can apply for vendor credit in the name of your business. Look for the vendors that do not require a guarantee or a credit check for initial credit, and that will report your payments to the business credit reporting agencies.

As payments are reported on more accounts, your business credit score will grow, helping you get approval on even more accounts without a PG.

How Does Business Credit Increase ROI on Your Personal Guarantee?

It’s almost like a domino effect. As you build a stronger business credit score without a PG, you are eligible for more and more accounts without personal guarantees. Eventually, you’ll be able to get a business credit card without a guarantee.

Here’s where things really start working in your favor. Use these accounts as much as possible. Be sure to responsibly repay credit issued to you. Rely on these accounts as much as you can, and you will reduce your need for a loan. In turn, you reduce your need to give a PG. There is an inverse relationship between personal guarantee and the amount of funds you get with it. The more money you can get with less personal guarantee, the higher the ROI.

An Oversimplified Example

Say you apply for a $10,000 business loan. The lender approves it, but you have to put up a guarantee for the entire amount. That means if your business defaults, you are responsible for the whole thing. You have the potential for an excellent ROI if the business doesn’t default, but if you have issues, you could lose $10,000 of your personal funds.

But, consider the same scenario except, due to your strong business credit score, the lender requires a 50% personal guarantee. Your potential ROI on that is much better, because at the most, you would only personally be responsible for $5,000. 

As your business credit score goes, the need for a personal guarantee decreases, making your ROI on PG increase.

Is There More Than One Kind of PG?

Yes!

Usually, we think of an unlimited personal guarantee. However, there are also limited guarantees. A limited guarantee allows a lender to collect a certain amount of money or a certain percentage of the outstanding balance from a principal or business owner. These guarantees are common when there are several principals who can pay a certain fraction of the debt. For instance, if a small business defaults on its loan, the lender can go after each principal for 25% of the balance.

With a limited guarantee, the business owner has some protection. Not all their assets are on the line, which in itself increases borrower ROI. Since lenders can seek repayment from more than one of the owners, there is still value, even if the business fails and does not fully pay the debt. This is another way to increase the ROI on your personal guarantee.

When Can Business Owners Get More Value from Providing a Guarantee?

Sometimes, you need to make investments in equipment or inventory in a short time frame. Or you may want to buy quickly in order to hedge against rapidly rising inflation. In this case, after business owners evaluate risk and costs, they may determine that gambling on personal liability is worth it. That is when you weigh the potential ROI against the guaranteed ROI of nothing if you do not take advantage of the opportunity.

The initial investment may be scary, but it may also be worth it in the long term if it helps your business grow, thrive, and reach its full potential. In the end, business loans are risky on all sides. However, without risk there is no growth. No one starts a business and hopes it never grows. Growth is the first goal. Business growth equals profit growth, which is the ultimate ROI.

Loan agreements that require personal guarantees definitely have the potential to reduce ROI on the business overall. So, it is vital to carefully consider any loan agreement to discern whether it is worth it, or not.

As always, whether or not a PG is necessary is not the only thing to consider. There are also loan fees and legal fees that come into play. Pay attention to those. They can add up.

What Does it Take to Get Maximum ROI on Your Personal Guarantee?

As with other investments, the ROI on your personal guarantee depends on a number of factors. The key is to protect your own credit history while still giving your company it’s best shot. If an owner needs to personally guarantee funds, that isn’t a bad thing. Yet, it is important for small businesses to balance that with other credit that does not require that personal assets be sacrificed.

This means that the company has to have credit in the name of the business, separate from that of the owner. This business credit will not remove the need for a PG completely, but it can reduce it drastically. It can increase the amount of credit available without a guarantee, and reduce the amount of guarantee necessary for those accounts that still require one.

Another thing business credit can do is help you get lower interest rates on accounts. Since that means the funds cost less, it’s an automatic boost to ROI. Anytime you can get lower interest it’s a good thing.  

Balance is key. Find out how to set your business up to get the most possible funding without a personal guarantee with a free Business Finance Assessment.

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SEC Aims to Shore Up Money Markets, Curb Insider Trading

Chairman Gary Gensler cited the “dash for cash” that occurred among investors at the beginning of the Covid-19 pandemic last year.

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How to Create Evergreen Content Right From the Start

Evergreen content engages and educates readers for longer without a huge amount of effort. Once you master the art of writing “timeless” content, you can ensure your articles, e-books, and tutorials stay relevant for years to come.  Below, I’m going to show you exactly why evergreen content should be part of every marketer’s content strategy, …

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New comment by mattnedrich in "Ask HN: Who is hiring? (November 2020)"

Gambyt | Full Time | Ann Arbor, MI | Onsite or Remote https://www.gambyt.com Gambyt develops digital solutions for lottery industry and aspires to enter the casino and sportsbooks markets in the future. Our expertise includes responsive websites, native mobile apps, games of chance, player loyalty programs, and digital promotions. We’re looking to hire: * Senior …

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How to Get a Free Credit Report Sample

Your business credit isn’t the only thing that affects your ability to get funding.  Still, it is a huge piece of the pie. One way to see your business credit and get a feel for where you stand is to get a credit report sample.

A Free Credit Report Sample Can Help You Know Where to Start with Funding and Fundability

Unlike your personal credit report, you can’t really get a free copy of a business credit report.  However, you can get a sneak peak in some cases with these options. 

Nav

So, Nav is a service that will let you see a credit report sample from all three of the major credit reporting agencies.  But these are only summaries, not full reports.  Generally, that means you can see your score, and maybe the accounts you have listed.  While this will help you get your bearings, it will not suffice for the purpose of correcting mistakes or even to show you what you need to do to improve your score. You do have the option to pay for more information though.

Keep your business protected with our professional business credit monitoring. 

Credit.net

Similarly, Credit.net will let you see a credit report sample with their free trial.  There is no credit card required.  Also, after you pull the report, you have 30 days to check it out. As a result, at least once you can get a totally free look at your report.  Since there is no fear of missing a cancelation deadline and having to pay anyway, it’s a great option. 

Scorely 

Scorely offers you a credit report sample before you pay for an ongoing subscription.  In contrast to Nav or Credit.net, they actually calculate their own score similar to the big 3:  Experian, Equifax, and Dun & Bradstreet. They strive to be totally transparent and to make their reports easy to understand. 

CreditSafe

You do have to pay for an ongoing subscription to CreditSafe.  However, they will give you a credit report sample to get you started.  Also, they have a number of reports that are unique to them.  This means you are getting something that you may not get with the other monitoring services or even the standard reports from Dun & Bradstreet, Experian, or Equifax. 

How To Read Your Credit Report Sample

In truth, each reporting agency offers different types of reports and information. Similarly, they all contain the same general data.  You need to understand what your credit report sample says, whichever agency it is from, about your business.

Dun & Bradstreet

Dun & Bradstreet offers several different types of business credit reports.  In fact, there are six different reporting options in all.  They all offer different information related to credit worthiness, and it takes all of them to get the whole picture.  The price range listed above is dependent on which reports you want to order. 

The report most use is the PAYDEX.   This is likely because it is the easiest to understand, due to it being the most like the consumer FICO score.  It measures how quickly a customer makes payments and ranges from 1 to 100.  Scores of 70 or higher are acceptable.   For example, a score of 100 shows payments are made in advance, and a score of 1 indicates that they are 120 days late, or more. 

The other Dun & Bradstreet Credit Reports include:

  • Dun and Bradstreet Delinquency Predictor Score

The delinquency predictor score measures how likely it is that the company will not pay, will be late paying, or will fall into bankruptcy.  The scale is 1 to 5, and a 2 is good.

  • Financial Stress Score

The financial stress score measures pressure on the balance sheet.  It shows how likely the company is to shut down within a year.  These scores range from 5 to 1, with a score of 2 being a good thing. 

  • Supplier Evaluation Risk Rating

This rating ranks the odds of a company surviving 12 months.  The minimum score is a 9 and the maximum is 1.  A “good” score is 5. 

  • Credit Limit Recommendation

The credit limit recommendation reflects a business’s borrowing capacity.  It is a recommendation for how much debt a company can handle. Typically, creditors use this to determine how much credit to extend. 

  • D&B Credit Rating

This one ranks overall business risk on a scale of one to four.  A score of 2 is good.  The rating is given in conjunction with letters, the combination of which indicates a company’s net worth. 

Even if there isn’t enough information on a business to assign a regular rating, Dun and Bradstreet will assign what they call a Credit Appraisal Score.  This is based on the number of employees. Another option is an alternative rating based on what data is actually available.

Keep your business protected with our professional business credit monitoring. 

Experian

Experian’s uses what it calls Intelliscore as its credit ranking.  There are more than 800 different factors that they use to predict a company’s credit risk. With Intelliscore, a score of 76 or higher indicates a low risk of default or late payment. If a score falls between 51 to 75, it indicates a low to medium risk.  Scores from 26 to 50 are medium risk, and from 25 down to 1 is medium high to high risk. 

Here is where Experian gets tricky. Intelliscore is a blended score of both the business and business owner’s personal information.  That means it offers insights into a business’s public record findings, collections, and payment trends, as well as overall business background. Experian is also unique in that it does not ask businesses to self-report.  Instead, they collect all the information themselves. You will have to give permission for a lender to view this report, due to it containing personal information.

Equifax

Equifax collects information similar to Dun and Bradstreet, including: information from public records, financial data from the business, and payment history from creditors.  Credit utilization is also a factor, which accounts for how much credit you are using versus the amount of credit you have available to use.

The information is used to calculate various scores, including the business credit risk score and the business failure score. The first measures how likely it is that a business will become 90 days or more delinquent on bills over the next year.  The score ranges from 101 to 992.  The second ranges from 1,000 to 1610 and predicts how likely it is that the business will file for bankruptcy over the next 12-month period.  A lower score indicates higher risk. 

They also calculate what they call the business payment index.  This is the Equifax version of Dun & Bradstreet’s PAYDEX.  It even runs on the same scale of 0 to 100.  This is an indicator of payment history over the past year. It is different from the PAYDEX, however, in that you must reach a score of 90 or higher for it to be a good score.  

In addition, Equifax offers business identity reports to confirm a company actually exists. It verifies details such as the company’s tax ID, number of employees, and yearly sales. 

Equifax does not allow business owners to request reports on their own company.  They decide themselves when to start a credit file on a specific company.

Keep your business protected with our professional business credit monitoring.

A Note on CreditSafe

If you want to subscribe with them after you see your credit report sample, they offer 3 packages, Standard, Plus, and Premier.  The problem is, they do not list their prices on their website.  You have to request a quote to determine what your pricing would be.  They allow you to purchase individual products as well. 

CreditSafe is quickly growing in popularity. No doubt that is partly due to the subscription service it offers, which allows easy insight into your own company’s credit report. The free trial allows for test driving, which sweetens the deal even more. 

Their main score, the CreditSafe rating, works on a scale of 1-100.  It predicts the likelihood that payment performance will become 90 plus days beyond terms within the next 12 months or that the business will go bankrupt.  They offer a variety of other scores and reports that provide a ton of information however.

They collect data from over 8,000 sources including: 

  • FTSE Stock
  • Telephone research
  • Local Agents
  • Companies House
  • Gazettes
  • Branches
  • News
  • Trade Payment Data
  • Banks
  • Courts
  • Registry Offices

Of course, this is far less than 8,000, but it gives an idea of the sources they use to gather their information.

CreditSafe Business Credit Reports

  • International Score

This score is derived from the Creditsafe rating. It allows for a comparison of credit risk between companies that are registered in different countries.

  • Credit Limit

The Creditsafe recommended credit limit uses information from the business payment records and those of similar companies to calculate a dollar amount recommendation of the maximum amount of credit a company should receive at any one time.

  • Days Beyond Terms (DBT)

Compares how many days late a business pays its bills in comparison to other companies in the industry.

  • Derogatory Legal

This is a report on the number and value of tax liens and judgements that have been filed in the past 6 years and 9 months.  It also includes bankruptcies filed in the last 9 years and 9 months

  • Payment Trend

A report designed to highlight at a glance substantial changes in how a company is paying its bills. 

  • Business Spend Trend

Lets you know whether the total annual business spending is going up or down when compared to the previous year. 

Subscription packages come in levels, and the prices depend on your business’s individual needs.  You will have to speak to a consultant to get a quote. 

How To Use the Information on Your Credit Report Sample

Honestly, it’s a great idea to get a credit report sample.  But, what do you do with the information that is on it? Here’s what.  You use it to figure out where you need to start with building stronger fundability.  Truly, your business credit score isn’t the only thing that affects fundability.  In fact, there are many other factors that come into play as well. However, if you have a problem with any of these other factors, it will often be detectable on your credit report sample.  Once you see it, you will know what you need to work on, including business credit. 

What Affects Fundability? 

What are some of these other factors you can use your credit report sample to check? Here are just a few.

Other Business Data Agencies 

In addition to the business credit reporting agencies that directly calculate and issue credit reports, there are other business data agencies that affect those reports indirectly.  Two examples of this are LexisNexis and The Small Business Finance Exchange. These two agencies gather data from a variety of sources, including public records.  This means they could even have access to information relating to automobile accidents and liens. While you may not be able to access or change the data the agencies have on your business, you can ensure that any new information they receive is positive.  Enough positive information can help counteract any negative information from the past. If you see something on your credit report you did not expect, it may have come from one or both of these agencies.

Business Information

On the surface, it seems obvious that all of your business information should be the same everywhere it may show up.  However, when you start changing things up like adding a business phone number and address or incorporating, you may find that some things slip through the cracks. If you see accounts missing from your credit report sample, or accounts on it that should not be, you may have a problem with this.

The Application Process

Consider the timing of the application.  Does your credit report make it seem as if your business is currently fundable?  If not, get to work.  

Use Your Credit Report Sample to Build Fundability

Biz Credit Reporting Review Credit SuiteOf course, there are a lot of factors that affect fundability that you may not be able to use your credit report sample to check on.  Still, getting a peek at what is on your business credit report is a fabulous start.

With the information you see, you can start making some decisions about how to create stronger business fundability.  If you see an issue with any of these factors you need to work on it. Seeing a credit report sample is the first step toward detection and correction. Also, I would encourage you, don’t stop with a credit report sample.  You need to see more. Regular monitoring of your business credit is vital.

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