Free Online Article Directory. For Article Authors & Publishers
Can You Handle the Truth and Consequences of a Business Loan Guaranty?
There are great business ideas that would catapult us to the next level of success if only we had the money to realize our strategic plan! Many executives begin the painstaking and often fruitless search for a loan. They are quickly faced with the dilemma of insufficient credit, collateral, cash flow and the need for credit support. Some business borrowers have the personal financial resources to be their own guarantor. Others must reach out to friends, family and associates for a little help.
Here are 7 truths about business loan guarantees that every borrower and guarantor must know:
Truth #1: You do not understand loan guarantees The guaranty is a backstop for the forward-looking promise to repay the loan. The borrower gets the money it needs at a more favorable rate and less restrictive terms. The lender mitigates its lending risk with an additional form of repayment. The guarantor can fall into unexpected and costly financial entanglements with little or no risk adjusted compensation. Guarantees are complex agreements that require the help of an experienced finance executive and attorney.
Truth #2: You are not smarter than your lender What makes a guarantor believe it is smarter than a lender? The lender has resources available to accurately underwrite and create a risk profile of the borrower. An accurate risk assessment leads to appropriate loan pricing and terms. The guarantor is rarely in a position to objectively assess borrower risk. Instead it relies on a self-serving review of internally prepared financial statements without ever doing a comprehensive financial analysis to determine borrower creditworthiness. The guarantor is often conflicted because the borrower is a family member, friend or business subsidiary of the guarantor.
Truth#3: You do not really know the borrower The further the degree of separation between the interests of the guarantor and borrower, the more likely it is that the guarantor will suffer an unintended financial consequence from issuing the guaranty. So why are seemingly smart business leaders so quick to issue a loan guaranty and clueless about the contingent financial risk?
Truth #4: Familiarity leads to credit blindness The guarantor is rarely compensated for assumed financial risk from the guaranty. The judgment of the guarantor is clouded and thwarts borrowing discipline. We also find this dynamic at work in consumer loans for houses, cars and credit cards. The parent has compassion on the young adult child and co-signs for a new loan. But is this a good gift for the child or the parent? The same question can be asked for business loans and guarantees.
Truth #5: Greed leads to speed While the guarantor may have a substantial net worth its judgment is clouded by a deep vested interest in the success of its subsidiary. The need for a speedy loan closing can have the unintended consequence of borrowing and guaranty missteps.
Truth #6: Borrowing discipline breaks down when a guaranty is pledged A borrower with shaky credit and poor collateral should not be a prime candidate for a loan. But when a guarantor enters the picture the financial discipline that would naturally be imposed by the lending market fades. The lender is satisfied with multiple sources of repayment and is willing to make a loan it otherwise would avoid. The guarantor has enabled the loan transaction with little or no direct compensation for the repayment risk it has assumed.
Truth #7: Lending markets should operate organically Credit decisions should be based solely on the creditworthiness of the borrower and the quality of the pledged collateral, not some pie in the sky strategic plan. Credit markets would be more stable without guarantees although access to funds would likely be more restrictive with higher borrowing costs. Moral hazard would likely be reduced because the absence of a financial backstop would naturally impose greater borrowing discipline.
Society would enjoy greater financial stability from a better understanding of the truth and consequences of loan guarantees. Questionable projects would die on the drawing board with a new reality that funding without credit enhancement is unlikely. The lending community would embrace great projects because of their solid business fundamentals and high likelihood of repayment. Borrowers would exercise greater borrowing self-discipline with the understanding that any loan they made would be their responsibility with little possibility of outside intervention or rescue. Get smart about loan guarantees.
Author Resource:-
Mike Shelton is a professional executive coach and business consultant with over 20 years of finance and management experience. Call him at 602.463.1199 or email clientcare@sheltonbusinessservices.com to discuss your business coaching and management consulting needs. Visit us online at sheltonbusinessservices.com for management consulting and executive coaching services.
Would you like to have a consistently reliable source of loans for your small business? Then you must learn how to invest in your lending relationships. Only then will you have a stronger and more durable partner for business financing. So let's explore how you can unlock the secrets to reliable lending relationships
A personal loan, or unsecured loan, is a specific type of loan that is secured on a borrower's personal credit standing, not against any private property. A loan is usually agreed to be repaid over a set period with scheduled monthly repayments. Establishments providing personal loans include traditional banks, online banks, credit unions, and other types of lenders.
Business loans have ancillary terms and conditions which govern the actions of the borrower and provide remedies for the lender. The smart borrower knows where the miscellaneous landmines are buried in the business loan and takes action to limit lender interference in daily operations.
Business loans have ancillary terms and conditions which impact the financial condition of the borrower and provide remedies for the lender. The smart borrower knows where the miscellaneous monetary landmines are buried in the business loan and takes action to limit financial fallout. Here are some loan terms that you should step carefully around to avoid blowing up your business finances.
One solution many businesses are turning to in order to make financial management less costly and less risky is the introduction of reloadable MasterCard credit cards, also known as prepaid credit cards.
Originally, the concept about the payday loan was to offer customers a short-term, high-interest loan with no credit or background checks. Customers simply write post-dated checks from their personal checking accounts to get the money and upon returning, they repay the principal plus interest and lending fees.
Both businesses and people can order checks online. Anyone with a checking account is eligible. Many times the bank-provided checks don't provide everything people want when it comes to their checks. More often than not checks online are cheaper than bank provided versions.
There have been plenty of headlines lately about the outrage consumers are expressing over the proposed debit card usage fee that many banks announced. The new debit card fee would zap as much as $5 per month from your account if you used your debit card for purchases (not at the ATM). Florida credit unions have seen membership surge as customers leave big banks, reports the St. Petersburg Times.
Based on the rapid retreat by banks to charge us for using our debit cards, there's no doubt that American consumers are unified in their outrage. Case closed. However, there is a fair fee that banks should impose on us immediately to help recoup the massive revenue loss that banks suffered when the government passed regulations which capped off swipe fees. Shut the front door! It is only fair!
A hardship letter for a short sale can be of major importance to a home owner who finds it difficult to continue making payments on there mortgage. Its vital that this letter include all of the factors that make repayment of the loan impossible. It could be the loss of a job, a major medical expense, divorce or other situation. Learn these key elements and more by reading this article.
![[Valid RSS feed]](http://www.articlelisted.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Michael Shelton's Author Feed
Print This Article
Add To Favorites 