Business Loans: How to Get Released from a Personal Guarantee

Personal guarantees are a common requirement to obtain business loans, and it makes sense for the banks: if a business fails, it just dissolves into nothing and banks are left with nothing. If your business is less than three years old, a personal guarantee as surety is usually the only way to secure a business loan.

After the business has been established, business owners typically want to separate their personal finances from the business finances. A key step is getting personal guarantees released from existing business loans.

The first step is to speak to your business banker about getting released from the personal guarantee. The bank will probably want to say "no." You will need a great pitch to convince your banker that the loss of a personal guarantee does not increase the risk of nonpayment on your business loan.

Prepare the following information for your meeting with the bank:

  • Accurate financial statements for the previous two to three years.
  • Realistic business projections for the next one to three years.
  • Strengths and weaknesses of the business finances.
  • Plans to address weaknesses of the business finances.
  • Alternative collateral to offer as surety in place of the personal guarantee.

Reasons that banks may refuse to remove a personal guarantee from a business loan can include a low cash reserve, wild seasonal swings in revenue or over-reliance on one or two key accounts that would seriously injure cash flow if the business were lost. A bank can also be spooked if it appears that key executives are on their way out of the company.

If your business banker brings up any objections, make a plan with him to review the business finances in three to six months.  Keep in touch with your banker about once a month during this time to keep him apprised of your progress in addressing his concerns. Communication is the key to getting your banker on your side.

If the bank will not release the personal guarantee, alternatives are to pay off or refinance the business loan. Paying off the business loan is the easiest way to be released from a personal guarantee. If the business finances are sound and there is a good deal of cash on the books, it may make sense to do so.

Often it is not prudent to retire the business loan. If so, refinancing is necessary. The process of refinancing a business loan is similar to the original application method. Business finances must be presented in clear, concise documents, and the bank loan officer will meet with the business executives to assess the bank's risk.

Be ready to make a case as to why a personal guarantee is not necessary for the business loan. This can include reasons such as a high cash reserve, diverse customer base or a large new contract that guarantees sufficient income to service the loan for its entire term. Offering incentives such as moving bank accounts to the new bank may also serve as an incentive for the bank to grant the business loan without the personal guarantee.

Developing a relationship with a non-banking entity such as a private equity firm may provide a good alternative for refinancing or paying off your business loan.  Private equity firms have more flexibility in negotiating business loans than banks do, but will want to see the same professional presentation and transparency of your business finances. You may be able to negotiate an equity sale to pay off the debt, or refinance your business loan without the personal guarantee.