The Truth About Using a Personal Guaranty on Business Credit
You're filling out a credit application. Everything is going along just fine until you get to that box at the bottom... You know the one — where you're being asked to provide a personal guaranty — and, suddenly, you hit the brakes. Why is it, when you are working so hard to separate your business credit from your personal credit, those suppliers or lenders wanting you to mix them all together again?
Ugh! The dreaded personal guaranty! It's like hiring a divorce lawyer before you're even married! You're working so hard to separate your business credit from your personal, and those pesky suppliers and creditors expect you to mess it all up again.
A personal guaranty (or guarantee) is an agreement that says you'll be held personally responsible for the debts of your business if, for whatever reason, your business doesn't hold up it's end of the agreement. But just because you are being asked if you are willing to provide a personal guaranty, doesn't mean you will be required to do so.
Let's take a step back and look at things rationally for a minute...
When you're applying for credit, the lender or supplier usually doesn't know you or your business. You're asking them to act on faith, and faith alone, that your word is good enough. Unfortunately, for every business that has operated on faith alone, there are a hundred that are carrying debt they will never recover. Smart (and profitable) businesses don't rely on faith. They rely on data...
In most cases, that lender or supplier is going to perform a cursory review of your business reputation. You're applying for business credit, so they are going to pull a business credit report. All too often, this is an automated process that started the moment you clicked the "SUBMIT" button on that application, so no human interaction has occurred.
They (or their system) will check to make sure the business information you provided in your application (company name, address, phone, and principals) matches a business credit report on your company. They may also perform a soft pull of the personal credit report to verify your identity, now required by law on most financial applications.
If the data matches, and scores and risk ratings are present, the creditor will be able to determine how well you fit into their criteria: the age of your business, how much credit they can extend to your business, what terms you can be trusted with, what interest rate you will qualify for, and how much has been extended to you by other creditors. If the stars align, you'll get approved and no personal guaranty will be necessary.
If there is no business credit report, or if the information in your application doesn't match what is there, or if your scores and ratings don't meet the base criteria, the lender's only option is to ask you to personally guaranty any credit they provide to your company. It's either that — or nothing...
If you've checked that little "willing to" box and agreed to act as personal guaranty, there is now an option for your potential creditor to initiate a soft pull of your personal credit. That may give them all the information they need to make a decision, but they may be required (through company policy) to make a hard pull on your personal credit to verify:
You are who you say you are
You are not the victim of identity theft
You are not on any terrorism watchlist
You actually own or work for the company listed on the application
Your personal FICO score puts you within their base credit score criteria.
If you didn't agree to personally guaranty, that option doesn't exist. It's possible the application will draw an in-house review, (where a human actually manually reviews the file and researches your company to see if you meet extended criteria), but, in most cases, the application is just summarily declined — meaning you get one of those annoyingly polite "decline" emails.
Tips & Techniques to avoid the personal guaranty requirement:
Check your D&B report for accuracy. Data needs to match to the application and scores and ratings should be present. (See your report for free at http://iupdate.dnb.com)
Make all business purchases in the business name. Even small, prepaid, one-time purchases ordered online may flow into your credit file.
Pay all business invoices with a commercial checking account or debit card, and be sure the invoice has your correct business name and address.
Verify the name and address on your bank account reflects the same as what is showing in the D&B report.
Check to see if you have a Business Experian or Equifax for Business report, and make sure they are up-to-date and accurate, as well.
Always ship purchases to the business address. If necessary, you can add an alternate address to your corporate credit profile.
Whenever possible, add unreported payment history to your D&B file. Every payment you add has the potential to boost your scores and ratings by up to 90%.
Make sure your website is operational and reflects correct contact information. (If you need a website created for your business, reach out for some affordable options.)
Verify your official business registration has your current address. Using a registered agent is fine, but you still want the business address listed.
Dispute any negative payment history to see if it can be removed, edited, or out-weighed by making a new purchase and on-time payment.
Pay off liens, suits, and judgments, or dispute out-dated public filings to have them removed before you apply for credit.
Limit NSF's and negative balance days in your business checking account since those can be a dominating factor and impact your ability to get loans and lines of credit.
Limit inquiries on your business credit profile by not opening or applying for too much credit per every 30-day period.
Whenever required, agree to personally guaranty. You cannot expect your business to support you if you are not willing to support it.
Call for a free one-on-one credit analysis and consultation. Sometimes, a single piece of information can raise your credibility and boost your potential to get approvals.
Remember, being willing to personally guaranty credit for your business is not the same thing as being required to provide a personal guaranty. Until your business credit report can prove your company is strong enough to stand on its own merit, you may be its best ally and its staunchest supporter.
It's like that credit card executive told me last summer... "If you are not willing to stand behind your business, why should we?"