I was asked by a Seeker how to avoid the SBA bank's requirement of a personal guarantee. What other options are available? Since I too hate that requirement, I thought I would share my answer and see whether anyone else had thoughts on this topic.

[Caveat - I'm neither accountant nor attorney, so this discussion should not be construed as legal or accounting advice!]

There are ALWAYS other options, but before discussing them, think about this: the defining characteristic of entrepreneurship is the ability to understand and accept risk. It's what we do that makes us more successful than others, because greater risk usually results in a greater reward. Add to that the recognition that no one else should be responsible for your ideas, your execution, or your mistakes. From this perspective, personal guarantees make sense.

So, how to avoid them? For people who aren't ultra wealthy, you'll probably have to avoid banks.

Your best option is seller-funded debt. Because the seller is intimately aware of the business's ability to generate cash and cover the debt, s/he may be willing to forego a personal guarantee. This option is usually less costly than banks too, and may provide tax benefits to the seller. Strategically, I would negotiate this during the purchase agreement negotiation. Once you have read the seller note, if it requires a personal guarantee, then I would offer an extra point to have that requirement removed. Since there is usually a 4-5% spread between bank rates and seller notes, you have plenty of room to negotiate a win/win for both parties.

Private equity/debt is another option. Depending upon your personal situation and the strength of your proposed acquisition, some private debt comes without personal guarantee strings attached. BUT, you will typically pay more for private debt than bank debt because "higher risk, higher return."

The last option is to buy with all (or more) cash. Some banks will drop the personal guarantee if their participation is low. If you have money in an IRA or Roth, don't be afraid to use it. There is a neat "trick" you can pull with IRA money and the bonus depreciation rule that results in a tax free Roth conversion with the added bonus of allowing your company to grow inside a Roth, which will then also exempt capital gains from taxes. Make sure you work with an experienced tax advisor or firm familiar with the rules here.

Good luck!

Jeff Greenspan ###-###-#### --@----.com