What Does a Personal Guarantee Have to do with Leasing a New Copier?
You’ve looked at all of the options and finally settled on a printer to lease for your new organization, only to find out that the leasing company requires a personal guarantee in order to process the funding. While this may seem like a surprising request, it happens to the majority of new businesses that request financing. In fact, The Small Business Administration even has a requirement that "All owners of 20% or more of [the] business provide a personal guarantee in order to obtain an SBA guaranteed loan.”
So now you are asking yourself, what will signing a personal guarantee mean? And how does it affect personal and business finances? We’re going to take an in-depth look at how a personal guarantee works and what methods you can use to determine whether signing one is the best decision for you and your organization.
What is a Personal Guarantee?
With regard to leasing, a personal guarantee is using your personal finances and credit history to backup a company purchase. It would be comparable to co-signing for a car. Generally, when a company has less than two years’ worth of positive credit history, a leasing company will ask for a personal guarantee in order to process a new office equipment lease. Small business owners that agree to a personal guarantee are often required to sign documentation confirming their financial responsibility if the business fails to successfully pay off the lease.
Deciding Whether to Sign a Personal Guarantee for Your Company
This is a personal decision for each business owner. In all reality, it can be an intimidating situation to have your private credit on the line for a company expense.
There are a couple of different methods that can be applied to the personal guarantee decision-making process.
Decide to build credit
- Using personally guaranteed leases can be seen as a way to build future credit for the business. Owners can choose to sign personal guarantees on smaller financed business assets as a way to build their organization’s overall credit. By showing successful payments and completed lease terms, the organization will have the opportunity to qualify for future high-cost leasing opportunities. We see this a lot with copy machine leasing, business owners choose to sign the personal guarantee on a copier or printer lease as a way to start building the business credit history.
Decide based on necessity
- If your organization has determined that the leased equipment is essential to business operation, then the owner will consider the personal guarantee requirement worth accepting so that the organization can function successfully.
Decide based on the total lease investment
- What can you personally afford to lose if the company fails to pay the lease? This process involves taking a look at your personal finances to decide how much debt you can comfortably take on in the event that the organization fails to meet the stipulations of the lease agreement.
- This uses the thought process that signing a personal guarantee on a two million dollar commercial lease carries a substantially higher risk than signing a guarantee for a piece of equipment valued at a few thousand dollars.
Getting Out of a Personal Guarantee
Refinancing may be an option once your organization has enough credit history to be approved for the lease. By refinancing, the financial liability of the lease will be transferred to the organization, ending your personal guarantee.
How a Personal Guarantee Applies to Office Equipment Leasing
Office equipment leasing has the same standards as any other business lease. Even small multifunction printer and copier leases may require proof of a positive business finance and credit history in order to qualify.
No matter what you decide is best for your business, you should still carefully read over the terms and conditions of the agreement. Ask for clarification on any areas that you’re unsure about and make sure that you completely understand what is included in the lease.
In the end, many organizations have found great success by starting with personal guarantees on financed equipment to help build a positive credit history for the company. This allows them the opportunity to get through the start up period, creating a strong foundation for the company and the ability to better negotiate future business expenditures.