One question that often comes up with business owners when looking at getting bank loans is whether or not they’ll need to have a personal guarantee on the loan.  Generally, for early stage companies or companies in the small cap market, normally that personal guarantee will need to be on the loan.

It’s not that the bank necessarily intends to ever enforce that guarantee and they’re not in the business of taking control of your personal assets.  However, it is certainly there for psychological reasons.  The bank wants you to feel very strongly tied to the business and feel that you are on the hook for the loan.  They put serious money into your business and they don’t want you to take it lightly.

However, that doesn’t mean that you can’t get your name off the bank loan at some point in time, but it may be up to you to take the initiative to make that happen.  The best time to do this is when you’re applying for the bank loan in the first place.  What you want to do is talk with your banker and get some agreement on what performance targets could be hit and then, at that point, you’re name could be taken off of the loan.

However, if you already have a loan with a bank and you’re happy with the relationship, you’re not out of luck.  You could still have a conversation with the banker to see about getting your name off the loan now or establishing a time frame in the future.  Ask and you may be able to receive.  Don’t ask and it’s guaranteed your name will still be on the loan.

There are times when you can try and get your name off the loan, when the performance is pretty solid in your company.  You have strong cash flow from the business, not just strong income, since the income might be going for some purposes and not coming into the business as cash to strengthen the balance sheet.

One thing to consider is when you will be at that point.  Here are a couple thoughts:

1.  Collateral.  What kind of collateral base will you building up in your company over time and how does that compare with the size of your loan?  If part of your collateral base is in inventory, discount that 50% or more, or if it is in receivables probably discount that 20%, to look at things from the banker perspective.

2.  Your company’s cash flow.  How is the overall cash flow been that’s being generated by the company and what future commitments are there against the cash flow?

3.  Stability.  How stable have the results been in the company?  Have you generated positive cash flow year after year or is it an on again, off again type of thing?  The more stable you are the more likely you are to be able to get off your personal guaranty.

This probably will require that you do put together a financial plan for the next three years out, build the collateral in a plan, build the cash flow growth into the plan, and then make a case from the banker perspective that there will be good reason to take you off the loan as a personal guarantor.  Take this plan and help establish some specific target points.  In other words, financial targets to be hit that would automatically trigger the release of the guaranty.

So, to get your name off the loan, look at things from the banker’s eyes, develop a case with your plans going forward and talk with your banker to make it happen.