Entrepreneurial Finance: Analyzing the Demand for the Personal Guarantee

Walter W. Brown II, Captain, Supply Corps, United States Navy (Retired)Follow
Kent T. Saunders, Anderson UniversityFollow

Abstract

This study contributes to the current body of entrepreneurial finance literature by analyzing multiple aspects of personal guarantees. We conducted a survey yielding 1,462 responses from owners or managers of incorporated small businesses geographically dispersed throughout the United States. Of these, 383 C or S corporations had loans in place during 2014. The survey focuses on personal guarantees used on five types of loans: lines of credit, mortgages, equipment loans, vehicle loans, and a loan type referred to as "other loans." We found the variation increase in personal guarantees for equipment loans, vehicle loans, and other types of loans during the 27 years (1987 – 2014) to be significant with a 95% confidence level, with a 5% margin of error. We found an underinvestment problem (Ang, Lin & Tyler, 1995) exists as 12.5% of owners of incorporated small businesses have decided not to undertake a positive net present value project because the lender required a personal guarantee to obtain a loan for the project. We found lenders denied 10.9% of these 383 corporations a loan resulting in credit rationing because of these corporations' inability to meet the lender's personal guarantee requirements. We found more than 15% of the 383 corporation owners refused the lender's requirement to provide a personal guarantee. Almost 42% of the 15% still received a loan from the same lender after refusing to provide a personal guarantee. We found that only 22.2% of female small-incorporated business owners received a loan after refusing to provide a personal guarantee from the same lender. Compared to 51.4% of the male small incorporated business owners still received the loan after refusing to provide a personal guarantee. Overall, we found that only 37% of the 1,462 incorporated small business respondents had a loan in place during 2014 compared to 67% of incorporated businesses documented by the Federal Reserve Board's 1987 National Survey of Small Business Finances.

JEL Codes

L26, H81, G00

Keywords

Personal Guarantee, Small Business Loans

Recommended Citation

Brown, Walter W. II and Saunders, Kent T. (2020) "Entrepreneurial Finance: Analyzing the Demand for the Personal Guarantee," The Journal of Entrepreneurial Finance: Vol. 22: Iss. 2.
DOI: https://doi.org/10.57229/2373-1761.1379
Available at: https://digitalcommons.pepperdine.edu/jef/vol22/iss2/1