Determining Guaranty Fees for Those who Personally Guarantee a Company’s Debts

It is common for business owners to personally guarantee their companies’ debts.  This is a valuable service since many companies could not otherwise obtain financing in the current lending market.  But business owners are already exposed to considerable risk and do not want to assume even more liability.  When they do, the value of their guaranty should be reflected in their compensation.  (Imagine for a moment how much you would want to be paid if the owner asked you to provide that guarantee.)  In some situations, a fair guaranty fee may be as little as 1% of the amount guaranteed, or as much as 10% of the amount guaranteed.

If no separate guaranty fee is paid, the guarantor’s compensation should be increased to include an appropriate amount for this service.

In one situation, an owner’s compensation was increased because the owner had personally guaranteed some of the company’s debt which had no collateral.  By having his personal guaranty, the company had gotten a much lower interest rate from the lender than it would have otherwise.  The company increased the owner’s compensation by half the amount of interest that the company had saved by having the owner’s personal guaranty.  However, it is usually not that simple since most lenders will no longer even consider an unguaranteed loan if the company does not have enough hard assets or receivables to offer as collateral.

The courts have addressed the value of a personal guaranty, and acknowledged it as a valuable service.  Yet there is not a well-established, one-and-only method of computing the amounts.  Each situation must be considered individually with whatever reliable information is available.  Certainly determining a guaranty fee requires careful consideration of both the amount of the exposure and the risk.  A starting point may be to compare the interest rate to whatever you consider to be a risk-free rate.  Then consider other factors: How important was the debt to the company?  Was the personal guaranty required by the lender?  How many people guaranteed the debt?  Did the guarantor put up collateral, such as his or her residence?  Did the guarantor have the ability to pay, if necessary?  Is there another alternative to the personal guaranty?