Although you're probably hesitant to personally guarantee your company's loans, there are some instances when you're wise to do so.

Bank loan agreements typically limit the amount of funds owners can withdraw from their businesses. More money retained in the company over the life of the loan lessens the bank's risk.

Supplying your personal guarantee enables a banker to be more flexible in these loan covenants. After all, if you're personally liable, your company's credit agreement can be less restrictive. The interest rate might even be lower.

Another benefit from personally signing your company's loans involves newly formed enterprises. Many entrepreneurs have successfully brought new products to market before their company was creditworthy.

The financial clout of the guarantors made their bank loans possible. And the cost of funds was much less than charged by angel investors and the venture firms. Offering your personal guarantee can generate real value for your company in normal times. Unfortunately, our economy hasn't yet returned to normal.

Bankers nowadays are requiring more owners to backstop their company's loans. This always happens during a recession.

The Federal Deposit Insurance Corp.'s December 2001 report on the nation's 8,149 commercial banks declared "Quarterly Loss Provisions Reach Highest Level in More Than 10 Years." The 72 percent increase last quarter was the largest since the fourth quarter of 1990.

Additional repayment sources

These facts made me think back to that 1990 recession. I was busy trying to shore up our loan portfolio. One tactic was to obtain the personal guarantees on loans causing concern.

I remember a client calling me a "belt and suspenders banker." As CEO, he had signed the loan agreement for his company (the belt). He said that now having to also sign personally felt like adding suspenders.

His analogy was accurate, and it keyed my obvious retort. "If your belt (that is, your company's creditworthiness) were stronger then suspenders wouldn't be required."

In short, we needed an additional source of repayment. We gained access to his personal net worth just in case his company continued to deteriorate.

There is another important reason private company owners provide their guarantees. This month I've been asking those visiting my Web site what they feel is the primary reason for their guarantee. "It's my bank's standard policy" is their most frequent answer. (See the poll results at www.usprivatecompanies.com) Cynics might think this is just the quick and easy excuse their bankers gave them. However, many banks do have an inviolate policy requiring owners to guarantee their companies' loans.

This is especially true at institutions with separate departments for small-business and middle-market loans. At these banks, personal guarantees are a mandatory part of the small-business credit application. If your bank uses this approach, you might have to change departments before you will ever get your guarantee released. This means you'll need to increase your company's size to the point of outgrowing your bank's definition of small business. Middle-market commercial loans less frequently stipulate guarantees.

Past is prologue

Bankers ask two questions to analyze the value of a personal guarantee:

Bankers do the research needed to identify guarantors who have tried to shirk their financial responsibilities. If there's been a problem in the past, they won't presume a different behavior in the future.

ACTION STEP: If you're now being asked for your personal guarantee, realize you're not being singled out. Banks are dramatically more concerned about credit issues nowadays. Guarantees provide them great comfort. But try to obtain the automatic release when your company shares in the economy's inevitable rebound.