A recent column in Business Week about small business lending examined the role of the personal guarantee. “Given that most business loans are unsecured, a lender has little recourse, when a loan goes sour, beyond the personal guarantee of principals. And if the principals backing a loan are broke, a personal guarantee is virtually useless.”
The article went on to tell prospective borrowers what to expect: “Even with a blemish-free credit report and high FICO score, borrowers seeking $50,000 or more may be asked to supply up to three years of personal and business tax returns for income verification. This is in addition to financial pro formas and personal guarantees that lenders will otherwise require. Banks want to know that you have the personal resources to backstop unsecured loans.”
Plan your work and work your plan
Too often business people jump through hoops set before them by lenders without taking the exercises seriously from a business planning perspective. I often see a business owner in trouble about two or three years after startup when the SBA loans can’t be serviced. When I start talking to these business owners it amazes me that most don’t know their break-even point.
A business plan helps instill discipline. A business plan also gets business owners out in their businesses taking action instead of sitting behind their desks fretting.
Don’t just take my word for it
Here’s an article on formulating a business plan that claims that those who go through the process of developing a plan are more likely to obtain a loan or investment capital, make a major purchase, grow the company and grow.