The Risks of a Personal Guarantee Agreement

personal guarantee agreementA final loan condition we wanted to cover is the use of personal guarantees in raising capital. A personal guarantee agreement isn’t something you’ll often find in the venture debt financing sphere, but you might be asked to sign one if you pursue other forms of financing.

Specifically, bank loans and other lenders may require a personal guarantee should the business be unable to pay the debt. This means that you would personally be responsible for paying back the obligation in the event your business couldn’t. These guarantees are often required of the founder, owner, or another business leader.

Needless to say, a personal guarantee is a hefty decision with consequences that reach beyond your professional life. If for whatever reason your business couldn’t repay the debt, would you be in a position to take it on?

What about your savings and investment accounts? Are you prepared to liquidate them and potentially put your family at financial risk? Do you have assets that you could quickly liquidate — assets that you’re confident have sufficient value to guarantee an acceptable return? Would you be willing to sell your home? (And more importantly, would it sell in time?)

Why Debt Lenders Typically Don’t Require a Personal Guarantee

We can’t speak for every venture debt lender out there, but at River SaaS Capital, we’re not in the business of up-ending people’s lives. We believe in the strength and profitable nature of the SaaS business model, and we work with borrowers who are already in a strong position in terms of monthly recurring revenue.

Subscription revenue matched with low costs creates a healthy margin. It’s one that can certainly struggle with occasional churn, but it’s also one with significant revenue-generating and profitability potential. And if you’re not already in a reasonable position to succeed, we won’t take the risk of making it worse for you — and ourselves.

We also recognize that there are solutions that do not require (or through circumstances, compel) a loan arrangement to come down to personal repayment.

One of the advantages of venture debt financing is that debt lenders don’t take an ownership position in your company, whereas venture capital investors do. This, coupled with the fact that young SaaS companies often have little in terms of hard assets, means we can use other forms of collateral to help borrowers qualify.

Consider Your Options Carefully

While venture debt lenders typically don’t take personal guarantees, other financing providers might, especially if your business is young and doesn’t have the credit profile needed to secure funding on its own. Even if you include these lenders in your overall funding strategy, the obligations of the personal guarantee agreement stand.

Whereas other flexible options may utilize a warrant or other mechanisms to recoup a potential loss, a personal guarantee will keep you on the hook until the obligation is satisfied or you declare bankruptcy (and not just a business bankruptcy, but a personal bankruptcy).

We encourage you to explore all your financing options to grow your business. More importantly, we encourage you to explore options that give you the breathing room to grow what you’ve already spent so much time and effort building. You deserve the opportunity to focus on what’s ahead — not what’s looming over your shoulder.