“Here Are Some Basic Guidelines For When A Personal Guarantee May Be Required”
If you considering financing an equipment acquisition via an equipment leasing facility, then you may be wondering if and when you would need to provide a personal guarantee to get a deal funded.
Many times, business owners and managers will work hard to avoid providing guarantees without really understanding when they may be required.
While there can always be variations from one situation to another, here are some basic guidelines to follow.
First of all, virtually all equipment leases are going to require a guarantee of some sort above and beyond the asset being provided as security.
If the business is incorporated, it will automatically be required to provide a guarantee to the leasing company in most cases.
If the business is a sole proprietorship or partnership of some sort, the specific owner or owners will need to provide the guarantee.
For situations where a partnership is between two corporations, then only corporate guarantees are automatically required.
The point at which a personal guarantee is required or not has a lot to do with the financial standing of the borrowing or lessee entity, its commercial credit status, and the accumulated net worth that resides in the business.
A guarantee is all about providing additional comfort to a leasing company above and beyond the security in the asset, so the value of a guarantee is dictated by the net value in assets held by the person or entity providing the guarantee, covenant, or statement of assurance.
So if the business entity, in the form of a corporation, or having corporate entities as partners, can provide a sufficient financial guarantee or covenant to the financing source, then a personal guarantee will not likely be required.
In all other situations, it is very likely that a personal guarantee will be a requirement of the lessor.
So for example, even if you have a business that is very profitable, if you do not retain the profits in the business, the value of the business guarantee is going to be limited and therefore more likely that a personal guarantee is going to be required.
This is very common in service companies that do not have a lot of hard assets or have a need to retain profits in the company for business use.
So in most cases, early stage companies almost always have to provide a covenant or guarantee along with the asset security when applying to a leasing program.
Then, over time, as the business builds up its retained earnings and overall equity position, it will potentially be able to eliminate the need to provide the guarantees or at least enter into limited guarantees as the business financials get stronger.