Much like his business career, Donald Trump’s presidential election was filled with controversy. Trump, like many real-estate developers, is known for taking out large loans to finance his projects. For years, Donald Trump has used a powerful tool when dealing with bankers: his personal guarantee.
Many small business owners, and microcap management teams, would prefer not to provide personal guarantees when borrowing money. I always find that strange.
Borrowers who ask investors/lenders to invest in their company but don’t want to provide a personal guarantee present a huge red flag. If you don’t believe in your business enough to personally guarantee an investment, why should an investor or lender believe in your business enough to make a loan?
While a personal guarantee ensures confidence among investors, it also ensures that management will continue to be motivated to operate the business. Knowing management is committed is important because replacing small business management teams can be difficult if not impossible.
My advice is to follow the President’s lead. If you take on outside capital, don’t shy away from personal guarantees or other mechanisms designed to protect your investors.
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
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