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Personal Guarantee Insurance™ (PGI) Related Questions
- What is Personal Guarantee Insurance™?
Personal Guarantee Insurance™ (PGI) gives small and medium-sized business owners and commercial real estate investors protection for their personal assets when they sign a personal guarantee on a commercial loan. If, after liquidating the business assets, the guarantor must use their personal assets to repay the balance of the loan, PGI will cover up to 70% of the insured's personal payments, depending on the coverage purchased and the terms of the policy.
- How does Personal Guarantee Insurance™ work?
PGI is an annual policy, with a premium based on the size of the loan and the specific characteristics of the business or property. It is available only after the commercial loan has been originated and the guarantee agreement has been signed. Also, PGI is available only for a limited time after the loan closing.
For business owners or other guarantors who have signed a personal guarantee, PGI will cover up to 70% of the insured's payments under the guarantee after the proceeds from the liquidation of business assets have been applied, depending on the coverage purchased and the terms of the policy.
Personal Guarantee Insurance™ (PGI) is offered to small and medium-sized businesses and commercial real estate projects that meet certain qualifications (see “What are the Eligibility Requirement,” below).
- Who is Asterisk Financial, Inc.?
Asterisk Financial created Personal Guarantee Insurance™, creating a new category of insurance designed to offer relief from the emotional and financial hardship that can result from signing a personal guarantee.
Our company is run by a seasoned management team with knowledge and understanding of the challenges and rewards associated with growing a business.
- Is Asterisk an insurance carrier?
No, Asterisk is not an insurance carrier. To provide Personal Guarantee Insurance™ coverage, Asterisk has partnered with a publically traded property and casualty insurer specializing in coverage for small and medium-sized businesses. This carrier is rated A (Excellent) by A.M. Best Company.
- Is this a new type of insurance?
Yes. We know from first-hand experience that signing a personal guarantee can create emotional and financial stress. So we created a new type of insurance designed to provide some real protection and peace of mind for qualified business owners who are required to personally guarantee a loan for their business or commercial real estate project.
- Why doesn’t the policy cover 100%?
Personal Guarantee Insurance™ (PGI) is not meant to entirely eliminate the insured’s risk, but to share it.
If the insurance were to cover 100% of the loss, then the, borrower would have little incentive to resolve or address any operating issues in times of trouble. Instead, by covering 30% to 70% of the guarantor's payments under the guarantee, depending on the coverage purchased and the terms of the policy, the policy provides the insured with a safety net, should the business be unable to repay the loan. The PGI policy protects the guarantor's personal assets without eliminating the guarantor’s motivation to overcome difficulties and restore the health of the company.
- If my company has a bad year, will you cancel my coverage?
No, we will not cancel your coverage just because you have a bad year. Our underwriting team understands that there are events and cycles in the business that are beyond the control of an owner or guarantor.
You could unexpectedly have a single down year following a number of steady or growth years. In that situation, annual renewal will remain routine and as simple as possible.
- What is the process for renewal?
In most cases, the renewal process will be similar to the original application process and will require both business and guarantor information to be updated.
The process begins approximately 90 days prior to the end of the policy year. Our Underwriting team will review and analyze your information – including any changes in the outstanding loan balance – and reassess your coverage. You will receive a price quote for the next year and feedback from the Underwriter regarding performance trends that have had an impact on your premium.
- What if I my business has several bad years?
The Personal Guarantee Insurance™ policy is designed to give the insured the last word on coverage. As written, your policy gives you, the guarantor(s) / insured(s), the right to keep coverage in place even in times of trouble, as long as you adhere to the terms and conditions of the policy.
- How do I make a claim?
When unforeseen or unfortunate events occur, you simply notify the carrier by contacting Asterisk at 1.877.535.7744 and a Claims Manager will be assigned to you. This is outlined in the policy.
- What if I default on a loan but haven’t made a claim?
This is actually typical. According to the terms of the policy, the policyholder(s) must notify the company of the default. A Claims Manager will be assigned to you to help the insured guarantors understand the circumstances, how to cure the default or to work through to a claim.
- Who is the carrier for the insurance?
Asterisk has partnered with a publically traded property and casualty insurer specializing in coverage for small and medium-sized business. The carrier is rated A (Excellent) by A.M. Best Company.
- How much does Personal Guarantee Insurance™ cost?
PGI is an annual policy, with a premium based on the size of the loan and the risk characteristics of the underlying business. By asking just a few questions over the phone, an Asterisk Business Development Representative will be able to provide you with a preliminary quote. To determine how much it would cost for you, contact one of our representatives at 1.888.6GET.PGI (1.888.643.8744, Monday – Friday, 9 am – 5 pm).
- What are the eligibility requirements for Personal Guarantee Insurance™?
We look to underwrite risk that is associated with small to mid-sized businesses, generally with revenues between $5 million and $100 million, or commercial real estate properties with values between $750,000 and $15 million. These businesses should have a consistent performance record with a minimum of five years of operating experience and three years of credit history.
- Can I talk to someone if I have more questions?
You can talk to our representatives by calling us at 1.888.6GET.PGI (1.888.643.8744, Monday – Friday, 9 am – 5 pm).
- What information and documentation are required to apply?
To evaluate a request for coverage, our Underwriters will first need the completed application for Personal Guarantee Insurance™. This should be accompanied by the same financial information you submitted to your lender for the loan. We’ll review your financial information, tax returns and credit scores (both personal and business). The review will also look at the structure of the loan, using the loan closing documents and any appraisals.
- What is the underwriting process?
Our underwriting process is similar to, but a bit more efficient than, your lender’s process. Once we have a completed application (see answer above or the PGI application for what is required) our Underwriters perform a risk assessment and establish a risk-based premium. Since you would have already compiled the required information for your lender, the process will move quickly.
- How long does the underwriting process take?
In most cases, we can complete our evaluation and analysis in less than a week.
- How do I apply for Personal Guarantee Insurance™?
If you heard about PGI through your insurance broker, simply ask your broker to assist you in starting a quote for a policy. If you do not have an insurance broker, you may purchase PGI directly from Asterisk Financial. To apply, simply call one of our Business Development Representatives at 1.888.6GET.PGI (1.888.643.8744), Monday – Friday, 9am – 5 pm. They are here to assist you and can answer any questions you may have.
- Is this product available nationally?
Yes.
- Is Personal Guarantee Insurance™ tax deductible?
If the coverage is purchased by the business, the premium may be tax deductible as a business expense. However, the tax deductibility of the premium will depend on your corporate and individual circumstances. Please consult your tax advisor regarding the deductibility of your premium payments.
Personal Guarantee Related Questions
- What is a personal guarantee?
A personal guarantee is a promise to repay the debt obligations of a business. Owners, a manager, an investor in the business or a family member are the typical signers of personal guarantees. These people (known as “guarantors”) agree that a lender has the right to pursue repayment of the business loan directly and personally from the guarantor and ultimately through their personal net worth.
- What is a guarantor?
A guarantor is an individual or business that agreed to be obligated to repay a debt should the original borrower fail to repay the obligation.
- Is it common practice for businesses to sign a personal guarantee when they borrow?
Yes, most owners of small and mid-sized businesses are required by lenders to personally guarantee company debt.
- Why do lenders require personal guarantees?
Lenders require personal guarantees primarily for three reasons:
- To incent management or the business owners to continue to support the on-going operations of the business.
- In the event the business is unable to repay the loan, the personal guarantee provides significant leverage for the lender to encourage management to act in a manner benefitting the lender’s interests.
- The personal guarantee adds secondary collateral (an individual’s net worth) to the primary collateral (business assets).
- How does a personal guarantee on a loan affect my personal assets?
If the business fails to make its payments on time, the lender can collect directly from any and all of the individuals who signed the guarantee. In essence, the personal guarantee eliminates many benefits of segregating personal and business assets related to the type of business you have (e.g., a Corporation) by cross collateralizing all personal assets as support for the business credit.
- Are there ways to negotiate better terms for a personal guarantee?
Absolutely, and every businessperson should try to negotiate the guarantee they are “asked” to sign. In general, these negotiations will be more successful prior to signing the guarantee agreement. Here are some options to discuss with your lender:
- Ask the bank for a ‘pro rata’ guarantee. This is a guarantee that is limited to the guarantor’s percentage ownership in the corporation.
- Ask to limit the duration of the guarantee. As an example, you would be released from the guarantee if the loan performance meets specific criteria, such as timely payments for 12 months.
- Ask the bank for a ‘limited’ guarantee. This is where the guarantee amount is agreed between the bank and borrower to be less than the loan amount.
- Find a high net worth individual to co-sign the guarantee with you. Typically, these costs range between 2%-4% of the loan amount annually and come with other contractual stipulations.
- If the business is owned among several parties, sign a ‘side letter’ that dictates the amount of each individual will pay in the event the personal guarantee is called.
- Can you be released from a personal guarantee before the loan is repaid?
Yes, however most guarantee agreements are not written to allow this. After a period of consistent performance, you can negotiate with the bank about releasing a guarantee or guarantor.
Banks will generally require a level of performance for a defined period of time before releasing the support. The most successful negotiations tend to be completed prior to the closing of the loan or during a renewal period, rather than during the term of the loan agreement.
- What should I do, as a guarantor, if the company defaults on the loan I guarantee?
The first thing you should do is find out why it is considered a default and what action the bank is taking (e.g. demanding the loan be repaid or just requiring the default be cured). Not all defaults have the same consequences for the company and the guarantor.
Some defaults are technical in nature and can be “cured” quickly and without significant consequences. These may include reporting requirements or a minor breech of a non-financial covenant (e.g. insurance coverage). Other defaults, such as a payment default, have more serious implications for both the company and you as a guarantor.
Secondly, understand the default and what corrective actions the business has planned to remedy the default.
Finally, if you are active in the management of the business, contact your lender / creditor and inform them of the steps the company is taking to remedy the default. If you are not active in the management of the business, make sure management communicates with the lender regarding the plan.
- Does the type of business I have offer any protection?
Guarantees can be required by a lender whether you’re organized as a partnership, sole proprietorship or corporation. That’s because once you sign a personal guarantee, the type of company you own has no impact on protecting your personal assets. By signing, you are waiving any such protection you might otherwise have received.
- How long will the personal guarantee be in effect?
A personal guarantee is typically in effect until the underlying business loan is paid in full. It may continue beyond that date if you have other debt obligations with the lender that are subject to the guarantee.
- If I leave the company, is my lender required to release my obligation to the personal guarantee?
No. The lender is not required release you in that situation. Your obligation to the lender ends only when the loan relationship associated with the guarantee is paid off and the lender releases the guarantee.
In order for you to be released before the loan is paid off, the other guarantors would have to agree to that change and sign a revised agreement with the lender.
- If a loan is in default, does the lender have to go after business assets before personal assets? Or do they have a choice?
Unfortunately, there is no single answer to this question. The options available to a lender vary depending on both the specifics of the guarantee as well as which state laws apply. You should ask knowledgeable local counsel about the lender’s options in your particular situation.
Partner / Multiple Guarantor Related Questions
- What does it mean when a personal guarantee uses the language “joint and several”?
“Joint and several” applies to loans where there are multiple guarantors. This legal language means that any guarantor (usually the guarantor with the largest liquid net worth) can be held liable for the entire debt. In other words, each guarantor is at risk for the full amount of the loan or the maximum amount of his or her guarantee.
- Do all the partners in the company have to sign the same guarantee?
No. However, typically if there are multiple owners in the business, each will be required to sign a guarantee. Although it is not encouraged, please note that the terms and conditions of the same guarantee can vary between partners.
- What happens if certain partners own more of the company?
Under the terms of a standard, joint and several personal guarantee, lenders are not required to liquidate personal assets in any order or in a way that is proportionate to ownership shares among the partners. Usually, the lender will simultaneously pursue all the guarantors, but the lender can, and many times will, pursue a single guarantor or a specific set of guarantors more aggressively. This is likely to be the case where there is one guarantor that has a larger personal net worth than the other guarantor(s).
- What happens if certain partners have more personal assets than other partners?
In situations like this, the wealthier partners would face the possibility of having more of their assets liquidated, especially in a “joint and several” agreement. To reduce potential conflict, the partners, amongst themselves, could sign a “side letter” that dictates the amount each individual will pay in the event the personal guarantee is called. However, the side letter has no impact on the lender’s rights or actions.
- What are some important issues for business partners to address before signing a personal guarantee?
First and foremost, you should make sure all parties fully understand the details and implications of a personal guarantee, in particular the fact that it could result in the loss of a home, car and other personal assets.
Of equal importance, the partners should discuss how the guarantee might impact their respective appetites for risk. Without agreement on this topic, it will be difficult to agree on a business strategy going forward.
It is also important to come to a consensus on how the partners will (or will not) address a situation where certain partners have greater wealth than others or where certain partners have a larger ownership share than others.
Family-Related Questions
- What can we do to protect our family assets?
One harsh but undeniable truth about personal guarantees is that, should the business fail to repay a guaranteed loan, it can result in the loss of your personal assets, including the family home, investments, savings and other assets.
- How do other families deal with the decision to sign a personal guarantee?
The way business owners communicate about and discuss business matters with their family can vary greatly. For this reason, it is difficult to provide a “one size fits all” answer to this question.
However, it is advisable to inform your spouse about the nature of a personal guarantee and clearly explain the possibility of personal assets being liquidated.
Many families also find it useful to openly share thoughts and feelings about their confidence in the business, the risk created by the personal guarantee and the possibility of losing the family home, investments, savings and other personal items of value.
- Does the business owner’s spouse have to give consent when their husband or wife is signing a personal guarantee?
Typically, the business owner’s spouse would be asked to give consent when a home or other assets owned with their husband or wife are listed as collateral. However consent is not generally required for a personal guarantee. And while the spouse has the right to withhold consent for a joint asset to be pledged as collateral, the decision would very likely mean the underlying business loan would not be approved as structured.
- Does a personal guarantee apply to assets in the name of other family members, such as a spouse’s bank account or a child’s college savings?
A personal guarantee is the promise to fulfill the obligations of another. This promise does not extend beyond the parties involved; however a lender can argue that an asset should be subject to attachment if the funds used to purchase or create the asset are a direct result of the business operations. In short, you cannot be sure that just having them listed in another person’s name protects your assets.
Banker Related Questions
- What are the benefits of Personal Guarantee Insurance™ for my borrower? For my bank?
Personal Guarantee Insurance™ (PGI) helps borrowers preserve personal assets and get back on their feet following a business failure.
For bankers, collecting on the guarantee can be challenging, straining the banker / borrower relationship and creating significant public relations risks. By providing another source of funds to the guarantor at such a challenging time, PGI can help you maintain a positive relationship with your borrowers and improve recoveries.
- What does it mean to be a “Preferred” bank with Asterisk Financial?
Asterisk Financial recognizes exceptional banks and rewards their customers. By analyzing historical performance, we have identified those banks with superior credit performance. “Preferred” banks are eligible for a co-marketing program and customers of those banks will receive favorable pricing consideration when purchasing PGI.
- How do banks become a “Preferred” bank with Asterisk Financial?
Interested lenders can contact a Business Development Representative at 1.888.643.8744 (Monday – Friday, 9 am to 5 pm ET) to discuss the program.
Advisor Related Questions
- How does my client benefit from Personal Guarantee Insurance™?
For clients who have signed a personal guarantee, Personal Guarantee Insurance™ (PGI) provides relief from the financial and emotional hardship that can result from offering personal assets as collateral for a commercial loan.
In cases where a loan defaults, the business is liquidated and the lender seizes personal assets for full repayment, the policy will cover 30% to 70% of the insured’s personal payment, depending on the coverage purchased and the terms of the policy.
- Will I be compensated for recommending PGI to my client?
Asterisk does not pay fees or commissions to advisors who recommend PGI to a client. Commissions are only offered to licensed producers. For more information on selling PGI please visit the producer section of our site.
Customer Related Questions
- What is the claims process?
When unforeseen or unfortunate events occur, you simply notify the carrier by contacting Asterisk at 1.877.535.7744 and a Claims Manager will be assigned to you.
- When should I report a claim?
The claims process will progress more quickly and efficiently if one of our experienced Claims Managers has been involved in advance of the final resolution of the business loan and related personal obligations. This early involvement will allow the Claims Manager to provide you, the policyholder, with more options on how to use the policy to help resolve the challenges the business is facing. To speak to a Claims Manager regarding a claim or potential claim, please use our special claims hotline, 1.877.535.7744.
- When should I notify Asterisk if my company is beginning to have problems?
You should notify Asterisk as soon as there is a potential, or actual, loan payment problem. Once you do, the account is assigned to a Claims Manager who will inform you about the typical events that will follow the available strategic alternatives.
