Giving personal guarantees for business loans is risky
Owners of small-and medium-sized enterprises (SMEs) are putting themselves and their families at risk when they agree to demands by the banks to provide personal guarantees for a business facility.
Most business owners do not read the small print in the bank loan agreements and are unaware that their personal assets, such as their home and life savings, could be at risk if they signed a personal guarantee to secure finance for their business.
With banks tightening lending criteria, business owners are required to sign a personal guarantee as condition of a finance deal in addition to mortgaging their family assets as additional collateral.
“Business owners should
seek professional advice before signing a personal guarantee and look for alternative solutions to reduce the risk of losing their personal assets should the business face difficulties or even default on the loan,” said Shavasb Bohdjalian, CEO of Eurivex Trade Finance (http://www.eurivexfinance.com/) the alternative business finance solution provider.
The problem with many SMEs is that the vast majority are not properly capitalised.
Once a business idea starts generating sales, and the business starts to grow, the only way to secure working capital is to ask the bank for a loan.
The stock market as a means of raising capital is not an option, at least in countries such as Cyprus or Greece which lack liquidity, leaving SMEs at the mercy of the banks.
By far the most effective funding solution for fast-growing SMEs is to consider factoring or invoice discounting, whereby they offer credit to their customers, but their liquidity is not negatively affected, since they can assign their credit invoices to the alternative finance provider and secure immediate cash.
“When an SME assigns its credit invoices – i.e. sells its invoices for immediate cash, it does not need to pledge personal guarantees or mortgage tangible assets. The assigned invoice is the only collateral required,” said Athos Kyranides, Consultant at Eurivex
Trade Finance in charge of trade finance operations.
The alternative finance providers offer both factoring and domestic invoice discounting services, confidential or disclosed.
The majority of business owners prefer the confidential arrangement, whereas in factoring, the arrangement is known to all the customers.
Another key advantage of invoice discounting is that start-ups are also eligible to apply when the quality of their debtors or trade receivable is good and without providing any personal guarantees can secure immediate funding to finance their growth.