Loan guarantees or co-signing for cash?

Hi everyone -

Glad to be able to drop back in... I do it far too infrequently because there is so much quality info here everytime I come back I feel I need to catch up on every single post since the last time! (quite a poor reason indeed)

My printer is currently struggling to print off a number of Gordon and James Anthony's posts and I wanted to throw out a quick question while I wait.

Does anyone have any experience or know anything about bringing in partners for loan guarantees or co-signing on substantial portions of institutional interim financing?

I'm working on a ~$11m acquisition right now. Need probably a $2-4m chunk of bank financing (on top of that, I'll be doing some acct receivables financing/equipment financing separately).

All the numbers of course make sense. Cash flow is very healthy. Covenants and ratios all satisfy bankers. Good debt coverage ratio. Current management all staying in place. But I don't have the assets to personally collateralize that small 25-35% chunk for the bank and even with a steady record of growing profits, bankers are well, a lil conservative. I don't want anything to hold this deal up and if that means finding partners just for their loan guarantees and paying them outlandish fees, so be it.

I'm interested in anyone's experience with bringing in partners simply for:

loan guarantees
co-signing for cash as I've termed it (lots of family members do this on small lifestyle type or retail businesses, but I'm talking a little bigger)

Success,

Erik


P.S. The short of it is in searching through surety and unconventional programs that are out there what I've seen is things like : Investor gets $1m line of credit collateralized against $1m CDs or $2m securities. There are some fees and interest, etc, so the bank loans against this but keeps their interest because they're big risk scaredy cats. So they disburse say $850k to the company with a 12 month maturity. In essence, the investor is rewarded with some portion as a fee for making it happen and perhaps also a small 2-5% equity stake. So after seeing these long drawn out structures, I just keep thinking: if we're willing to pay up to a 15% cash fee for a loan guarantee that makes this happen, couldn't I just find someone more directly who liked the deal and was happy to suddenly have a big check at closing and a little equity in a strong company?

P.P.S. Clearly I think James Anthony's slight alteration of his online forum name is a good one for business confidentiality reasons... my middle name is Nigel so that will work for now

Nigel/Erik,

Thanks for asking.

Does anyone have any experience or know anything about bringing in partners for loan guarantees or co-signing on substantial portions of institutional interim financing?

My rule: NEVER co-sign or guarantee a loan for someone else and/or someone else's deal.

Sometimes, the best thing that can happen is the bank says "no". You may Think they are Too Conservative, but they have Many years of experience to back up their decisions. Take heed.

Michael Ross

Hi Michael -

Thanks for the response. That would be my rule too, unless I was already considering an equity investment It would be foolish to cosign for something you didn't view as a sound investment on its own.

On the other hand, for an investor who was already considering putting in cash, a guarantee/cosign instead could have the following benefits:

1. less money out of pocket/if CDs are collateral, still get additional interest
2. equity stake
3. substantial fee (10-20% of total amount guaranteed)

You're probably right about bank risk in many situations. Believe me, commercial lenders want to make this work. I'm just trying to feel out all the possibilities. And I guess the nice thing is you can potentially find an investor with more risk tolerance than the bank to partner up with and guarantee the loan.

*all provided the numbers still work for the deal and leave a large amount of cash flow after debt service!

Cheers,
Erik

Nigel/Erik:

Thanks for adding some more.

My rule applies whether I think it is a Sound investment, or the investor thinks it is a sound investment.

Let me explain...

The moment you co-sign or Guarantee a loan, YOU are where the buck stops. YOU have the most to lose. The person who you went guarantor for has a lot to gain and nothing to lose. YOU, as guarantor, are the one with Skin in the deal. The Lacky - for lack of a better word - has no skin in the deal. If the deal turns sour - and you must assume it will - the lacky walks and leaves the guarantor holding the bag.

Hence, it is Unwise to guarantee Someone else's loan or deal. Shouldering the burden whilst not having control of the deal or how the money is applied.

What is Foolish is... guaranteeing someone else's performance and shouldering all the financial burden while having no control.

Michael Ross