Sales Make it Happen
by Terry Winders, CLP
One of the hardest requirements for lease salespersons to deal with is requesting personal guarantees. Usually, but not always, it is because you need to add additional strength to the credit decision.
Requesting a guarantee usually sounds like you do not believe the business can live up to the agreement and some lessees take offence to the request so the approach is very critical.
One way is to explain that you want them to have complete freedom to manage their business assets without interference so if they give you a guarantee they can move assets and cash in any manner they wish. Most loans require loan covenants or indentures in companies with tight cash or limited ownership. Often the amount is low, but puts the borrowed amount over a bank cap or conditions regarding accounts receivable or other loans.
One of the oldest questions asked when a personal guarantee is not available, "Why should we have confidence in your company if you do not have enough to give a personal guarantee."
When a sole proprietorship or partnership gets over three years as a corporation, the personal guarantee is often asked to be waived; "that's why we incorporated."
You can be if their bank, or even their largest trade reference requires it, you can overcome this objection.
One of the most effective ways a lease has to compete with loans is the PG gives you the ability overcome a full sets of financial statements and tax returns or a more current financial statement, is to request a personal guarantee.
Relying on the personal credit helps these situations, or if you are relying on an "app only" or only have partial financial information, often a good personal guarantee will overcome this.
On some occasions it is because the language in a lease agreement does not allow for additional collateral, down payments, or loan covenants and you need additional protection, thus the personal guarantee gives more comfort to the credit decision. This is especially true in companies with a limited or small group of owners. If ownership is vested in a small group they have the ability to make all kinds of decisions that may leave you holding the bag if business begins to go south.
This guarantee allows your funder to litigate the individual in addition to the business. This puts all the guarantors' personal assets at risk to cover any short fall after the equipment has been repossessed and sold.
Understanding the requirements of each State is important because some States require you to complete litigation against the company prior to requiring the guarantor to step up to the plate. In these States the use of "Co- Lessee" is preferable, over a guarantor, so you can request past due payments and shortfalls immediately.
Terry Winders, CLP
Lease training and Consulting