Engineering Inc. - May/June 2013 - (Page 40)

Guest Column By James R. Coughlin Know Your Negotiating Strategy Before Signing a Personal Guarantee for a Loan E ngineering firm partners are likely familiar with personal guarantees (PGs), which banks almost always require borrowers to sign to secure a commercial loan. Enter into these agreements with confidence by following these five steps. 1. Know What Level of Risk You Can Accept 2. Define Your Terms In Advance Consider these important factors with your accountant, attorney and/or business partner(s) and know the answers before entering a bank: • Would you be willing to pay a higher interest rate in exchange for no PG or a limited PG? 3. Maintain Control Mention the PG up front with your lender. Most banks will want to first negotiate the terms of the loan and then the PG. Be clear about not wanting to sign a PG, and then tie the PG conversation to the discussion of other key loan conditions such as amount, term, interest rate and covenants. Ask why the lender wants a PG so you can address their specific concerns MELISSA SCHEETZ/GETTY IMAGES This will greatly affect the amount and type of your loan. Your adviser should evaluate the business’s liquidation value, taking into account any existing liens and the priority of repayment in case of bankruptcy. This is the value of your business should a PG be called. Next, consider how much you can personally risk on the loan, including your equity stake. The equation should be: business liquidation value + acceptable personal risk > personal guarantee. This tells you the maximum that you’re personally willing to risk under the terms of a guarantee. • Would you consider borrowing less money? • Would you be willing to put up a higher compensating balance (meaning a higher interest rate)? • Would you consider a shorter loan maturity date (meaning higher monthly payments)? 40 ENGINEERING INC. MAY / JUNE 2013

Table of Contents for the Digital Edition of Engineering Inc. - May/June 2013

Engineering Inc. - May/June 2013
From ACEC to You
Market Watch
Legislative Action
2013 Engineering Excellence Awards
Annual Convention Wrap-Up
Mobile Power
Guest Column
Business Insights
Members in the News
Mergers & Acquisitions

Engineering Inc. - May/June 2013