How to Get a Loan Without a Personal Guarantee

Question: We need to get a loan to pay off the owner-financier of our resort campground in South Dakota by March 2015. There are three of us in the limited liability company but none of us wants our name on the loan. Can we get a loan in the name of the LLC only? We are all equal shareholders.

Answer: It’s possible for a commercial real estate loan to be made without roping the borrowers into signing personal guarantees, but it would be “very rare” in the case of a single-use, single-tenant property such as a campground, says Bill Hettinger, principal at the Institute for Finance and Entrepreneurship, a consulting group. “Non-recourse loans tend to be for large, multiple-tenant buildings—think the regional mall or downtown office tower—and even these are often cross-collateralized with other buildings from the owner’s portfolio,” he says.

Start with a local banker who can give you an assessment of the collateral value of any assets at the camp that are not already pledged and might be used to secure the loan without personal liability. The problem you’re likely to run into is that a resort campground is considered a pretty risky enterprise: What if it’s destroyed by fire or other natural disaster? What if it falls out of fashion when a newer resort goes up nearby? Will people vacation there if there’s an economic downturn in the near future?

Many LLCs are creditworthy, but they need a long history of strong financial dealings substantiated by an excellent business credit report, says business financial coach Emily Chase Smith. If your LLC is a new owner of this business, even past performance metrics may not be enough to get you a loan without personal guarantees, she says. Still, it might be possible for you to negotiate a guarantee that lasts for a certain time period and is phased out as your business meets outlined financial targets.

A further option, if you own a mortgage on the campground property and the land has appreciated in value, is refinancing that mortgage, notes Roger Grabowski, managing director at financial advisers Duff & Phelps. That might yield sufficient cash for you to pay off all or some of the debt to the previous owner.

While it’s not unusual for business owners to resist tying their personal wealth directly to business loans, the reluctance comes across as wishy-washy to lenders. “Any lender is going to ask, ‘If the owners are not committed to their business, why should I commit my money?” Hettinger says. “Even if the owners don’t have substantial financial resources when they co-sign the loan, the fact that they are willing to sign personally is a strong indication of their commitment.”

If none of the partners wants to sign a personal guarantee, think about raising equity by giving up some ownership interest. If the resort is a local institution or you have a core group of seasonal customers, you might have a logical source of loan funds or equity investors. “Families who have frequented the campground year-after-year are the first people you approach. This is a time-consuming process but often proves fruitful,” Grabowski says.