Protecting Businessfolk from Personal Asset Lossby
Mark L. Ricciardelli is co-founder, president, and chief executive of Asterisk Financial Group in Middletown, Conn. The company, in partnership with Wesco Insurance, an affiliate of AmTrust Financial Services (AFSI), has created what it calls the world's first insurance product for personal asset loss for business owners, investors, and partners who take out personal guarantees to get business loans. The product, which he believes may have a $1 billion market potential, has been approved in nine states, with the number expected to jump to 25 by the end of the third quarter. Ricciardelli recently spoke about this innovative product with Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.
Karen E. Klein: How can you sell personal guarantee insurance when business failure rates are so high?
Mark L. Ricciardelli: That's probably why it has never been done before. It took us two years to get from the concept to a policy and build the business to launch it. We've designed and built a product to support small businesses that have some tenure. They have relationships with banks, they have been successful, and they want to grow their business.
Who are your target customers?
We're targeting small to midsize businesses, like hardware stores, that have been around a while, have been successful, and want to expand or need ongoing capital but want to limit their personal risk. Until now, the options for those people were not taking the loan, getting a relative to co-sign, or going to a high-net-worth person who'll charge a fee for co-signing. Those options are pretty painful. We wanted to provide another option for those who want to limit their downside risk.
What size loans are you looking at insuring?
Loans in the $500,000 to $5 million range for small and midsize businesses whose owners are signing personal guarantees. This is really for working small businesses, not startups taking out $25,000 or $50,000 loans, and not companies taking out loans above $5 million, which gets more into a corporate structure.
Is requiring entrepreneurs to sign personal guarantees when they take out business loans a new practice?
Personal guarantees have been around for years, but you had more flexibility in the past to negotiate around that demand, because there was some consideration given to the reserves of the company and how long they'd had a relationship with the bank. But today, with banks getting much stricter [about] underwriting during the credit crisis, the demand for collateral support has gone up, and the reality is that most banks won't give loans without a personal guarantee.
If the business has strong financials, and the owner believes in it, is the personal guarantee so bad?
A personal guarantee is a promissory note that gives the bank the right to go after the borrower's personal assets if there's a default. It's considered very onerous. Business owners go in to take out a business loan, the bank demands that they put up all their business assets, and then their personal assets as well. If the business fails, that's traumatic enough, but then they go after the owner's house, his cars, his bank accounts, and whatever. I have known people who've been wiped out by personal guarantees—not only financially, but their family life has been significantly [affected] also.
What's the cost of your insurance?
Cost depends on what kind of loan you're taking out. We're insuring personal guarantees on three types of loans: commercial real estate, commercial and industrial, and construction and development. The annual premium goes from approximately 1 percent to 3 percent per $1 million, with the average about 1.4 percent per million in coverage.
So if you signed a personal guarantee for a $1 million business loan, you'd pay approximately $14,000 annual to insure it with us. For something like an owner-occupied commercial real estate loan, which is highly secured with definable collateral, the cost could be 1 percent or less. On a construction and development loan, it would be closer to 2 percent.
And what does that money buy?
Our policy is structured like any traditional insurance indemnity product. In the event that the guarantor has a business failure and the personal guarantee gets called, we will indemnify that guarantor for a significant portion of their loss. Exactly how much is paid out depends on how much liability is remaining on the loan. The commercial aspect of the loan would get settled first, and then we'd cover 50 percent of the remaining net liability.
So if a business took out a $2 million loan and at the time of the loss the business assets covered $1 million of that loan, we'd cover 50 percent of the remainder, which is $500,000.
Who's going to be insured under your policies?
We cover joint and several liability under one contract. If two or three individuals are all signing personal guarantees, our policy applies to everyone who signs a guarantee.
Our target customer will normally have been in business for three or more years and have an established relationship with the bank. They're typically getting funds to grow their business or maybe borrowing money to buy out their parents in a family business. We like businesses in almost all categories, as long as they have the financial wherewithal to meet the debt service.