Personal Guarantees for Business Loans
Small businesses, need financing in the form of business loans to get started or to expand. For startup loans in particular, the business owner often must provide the lender with some type of collateral and a guarantee of repayment if the business defaults on the loan. Since a new business often has little collateral and no income to guarantee the loan, the business owner is often required to provide a personal guarantee. A personal guarantee is signed by the business owner pledging personal assets in the event of business default; that is, the owner's assets may need to be sold to pay off a business loan.
Personal Guarantee Insurance
New business owners are often concerned about the loss of personal assets if their business fails to pay its bills. But there is a new solution to keep personal assets out of the picture in the event of a business bankruptcy or default; this new solution is called "personal guarantee insurance." I asked Mark L. Ricciardelli, co-founder of Asterisk Financial, to provide information on this new type of insurance.
What is personal guarantee insurance?
Personal Guarantee Insurance (PGI) is a new insurance product created to provide small-to-medium-sized business owners and commercial real estate investors protection for personal assets when they sign a personal guarantee for a commercial loan.
Personal guarantees have long been a fact of life for business owners seeking a commercial loan but this doesn’t lessen the risk associated with signing them. By doing so, the signer, known as a guarantor, is responsible for satisfying the terms of the loan in the event of the business’ liquidation. This puts the guarantor’s personal assets (home, car, college accounts, retirement accounts, etc.) at risk. PGI is designed to protect the guarantor’s personal assets in such a situation.
If, after liquidating the business assets, the lender seeks personal assets to repay the balance of the loan, PGI will cover up to 70% of the insured’s net liability, depending on the coverage purchased and the terms of the policy.
By covering up to 70% of the guarantor’s net liability, PGI provides the insured with a safety net without eliminating the motivation to overcome difficulties and restore the health of the business.
Who pays it – the lender or the borrower?
PGI is an annual policy, with a premium based on the size of the loan and the risk characteristics of the underlying business. The borrower/guarantor purchases the insurance to protect their personal assets. The insurance is available to the business owner(s)/guarantor(s) as they have committed to a personal guarantee associated with a commercial loan. Coverage is generally only available for a limited time after the loan closing.
Who does it protect – the lender or the borrower?
PGI is designed to protect the borrower’s personal assets when signing a personal guarantee. However, coverage benefits may be assigned and many lenders view a purchase of a PGI policy positively as it provides additional value to the guarantee and reinforces the existing collateral on the business loan.
What are the limits to this insurance, in terms of both monetary amounts and coverage (what doesn't it cover)?
Coverage amounts are available between 30% and 70% of the stated value of a personal guarantee, at the discretion of the guarantor(s), up to a policy limit of $2.5 million. Coverage is available for most commercial and industrial loans (lines of credit, demand loans, term loans, commercial real estate, term facilities and commercial mortgages) and on a very limited basis, construction and development loans. Loans must be secured loan transactions. Coverage is available for government guaranteed loans, i.e., Small Business Administration (SBA) loans. Coverage is not available for unsecured loan transactions or highly speculative projects.
The typical company profile of a customer is a small-to-medium-sized business, generally with revenues between $5 million and $100 million, or a commercial real estate property with value between $750,000 and $10 million. The business has a consistent performance record with a minimum of five years of operating experience and three years of credit history or principals with an equivalent track record in the industry.
How does the insurance work, that is, how does it pay if a borrower defaults on a loan?
In case of a loan default, the insured(s) must notify the insurance company that issued the policy. A claims manager will be assigned to help the insured guarantors understand the circumstances, what the default means, and how to work through to a claim.
How much does it cost (average)?
PGI is an annual policy, with a premium based on the size of the loan guarantee and the risk characteristics of the underlying business and loan transaction. With the answers to a few questions, a preliminary quote can be provided. The cost starts at less than 1% of the total amount of the guarantee.
Mark L. Ricciardelli is Executive Director and Chief Executive Officer, and Co-Founder of Asterisk Financial. As an experienced CEO, Mark Ricciardelli brings global management experience across a variety of insurance products, innovative leadership skills, and a track record of building strong leadership teams. Before joining Asterisk, Ricciardelli was recruited by Kohlberg, Kravis, and Roberts (KKR) to become Group President and CEO of Alea Group Holdings, a publicly traded global reinsurance and specialty insurance company. Prior to Alea, he had senior leadership roles with multiple divisions for GE ERC (Employers Reinsurance Corporation), including President and Chief Executive Officer of Global Casualty; President – Facultative, P&C Reinsurance for the Americas; and Chairman, President, and Chief Executive Officer of ERC Asia Pacific Pte. Ltd. Earlier, Ricciardelli served in a variety of leadership positions at Swiss Re after beginning his career with Travelers Insurance.
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