Taking a limited personal guarantee for substantially better loan terms

September 09, 2020

by a searcher from McGill University

I have a great company under LOI and I intend to finance the entire purchase with a combination of my personal saving and a bank loan. I'm confident about the business but, it's my first acquisition.

I have received several term sheets but I'm torn between two:
1) 7yr amortization, 7% interest rate, no personal guarantee, no operating line or credit card
2) 8yr amortization with a sweep (capped, not too punitive), 4% interest rate with limited ($300k) personal guarantee, material operating line and credit card

What would you do?

10 Likes

20 Replies

352 Views

Replies

Reply by a searcher
from Harvard University in Houston, TX, USA

Without knowing almost any details about the deal and the finances it’s very difficult to give you concrete feedback. However, at least for us, we have noticed that the interest rate on the loan does not have too big of an affect on returns (for ourselves or investors). It obviously affects year to year cash flow and by running sensitivity analysis you can see how much safer or how much riskier each deal is, and it can give you better perspective on which way to go. Having a personal guarantee is no fun, so at least for me that would be a huge plus. Just some thoughts, good luck!

Reply by a searcher
from Harvard University in San Francisco, CA, USA

I'd probably go with #2. you want the operating line. negotiate the sweep to make sure you can keep enough capital in the business to reinvest. often lenders will have some flex on how the sweep is calculated (definition of Excess Cash Flow), when the sweep first turns on (try for, say, Q1 2022), when it shuts off (say leverage below a certain threshold) and whether sweep counts against mandatory amort reqmt (you want it to). happy to share other thoughts as well, send me a pvt message if you wish.

+18 more replies.

Join the discussion