“Should founders personally guaranty bank loans?” That is actually a funny question because for early startups, the founders cannot get bank loans. So, let’s assume that we are talking about a startup that is far enough along to get a loan (like for some equipment that can actually be a worthy secured asset). Perhaps the company has a bit of revenue, but certainly it is not profitable.
If the company has no institutional investors, then I think fully appropriate for the founders to concede to the request (which is inevitable) and give the personal guaranty. I have known plenty of business founders that are more than willing to do this. They view it as a non-issue as they consider the business failing “on their nickel” anyway. If there is no institutional money invested in the company, then the founder is typically in complete control and making the guaranty is a logical extension as the company’s pockets and the founder’s pockets are closely connected.
However, from my perspective, once a company has institutional funding, the personal guaranty dynamic changes completely. The founder is no longer in complete control. There are real constituents with whom the founder needs to constantly engage (i.e., the investors and board in particular). The founder reports to the board and the board can ultimately replace the founder if necessary. Imagine personally guarantying a loan and then being replaced? Yikes – don’t count on the bank releasing the guaranty just because the founder is no longer an officer of the company.
The trick is getting the bank to understand the changed dynamic. Silicon Valley Bank gets it. They invest on the strength of the venture investors and the fact that the venture investors have a vested interest in the success of the company. They will ask how much more dry powder the VCs have for the company prior to making the loan.
The “bank” that does not get it is the US government. SBA programs (there are a bunch of them – the general theme is that the SBA partners with the originating bank and guarantees a large % of the loan on the bank’s books) require personal guarantees from major stockholders. This includes founders. It may also include VCs depending on the extent of ownership (trigger is usually 20%). VCs cannot guaranty loans because their partnership agreements prohibit such activity. And the founder should not be put in the position of guarantying a loan for a company where the investors have much to say about direction and control issues (which is always the case with VC investments).
Time for the SBA to wake up and take away the requirement. It makes little sense and hinders what the SBA wants – company growth and economic development.
Great post Zach – this needs to immediately be sent to the SBA!
Great post Zack. The SBA makes me crazy with their total ineffectiveness in lending to high growth, venture backed companies. You do a great job of nailing why. I put this up as the VC Post of the day on Ask the VC
Brad, thx! Appreciate that endorsement!
Great post, Zach – thanks for the mention.
In a previous company, we were debating a loan from a major international bank (think it was for $150k). They wanted personal guarantees from the myself and the other cofounder of the company, though we had angel investors in the business. I had proposed to the board that the company pay a % fee to us two cofounders for providing the backstop to the loan. I think I had proposed 2%/year. At the end of the day, we didn’t end out doing the loan (for other reasons). But I think whomever is taking the default risk, should be paid accordingly.
Good points. Thx Sean.
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