Bank credit for a new limited company and personal guarantees

Key rules

• Personal guarantee: Banks very often ask the founders of a new SL to guarantee the loan personally, but it is a contract term you can negotiate.
• Alternatives: A guarantee society guarantee or ICO-backed cover can reduce or replace the personal guarantee.
• Guarantee society capital: The capital you subscribe to join a guarantee society is normally refundable when the guarantee ends and you leave.
• Bank requirements: Requirements differ from bank to bank, so ask each one for its full list.

What a bank will ask a new SL for

Expect the bank to ask for documents about the company and about you personally. The company has no track record, so the bank looks at the founders. Requirements vary by bank, so ask each one for its full list. The documents list below shows what to gather.

Banks typically also look for experience in your sector. They may ask for extra security on top of the guarantee, such as a guarantee from a guarantee society or pledged assets.

Why the bank asks for a personal guarantee

Personal guarantees from founders are very common for loans to a new SL. The reason is simple. A limited company protects you: as a partner, you are not normally liable beyond the capital you put in. If the company cannot pay, the bank would have nobody else to claim from. A personal guarantee fixes that for the bank, because you promise to repay with your own assets.

Be clear about what this means. The guarantee is a choice written into the loan contract, not a legal requirement of owning an SL. That also means it can be negotiated. The "What if the bank asks for a personal guarantee?" section below helps with this.

Ways to avoid or reduce the guarantee

When a bank asks for a personal guarantee, you have several options:

• A guarantee from a guarantee society (explained next).
• An ICO credit line, or an ICO-backed guarantee arranged through a bank. ICO is Spain's state financing body.
• Limiting the guarantee to a fixed amount or a fixed period.
• Offering collateral instead, such as a mortgage, a pledged deposit or equipment.
• Public or participative loans from bodies such as ENISA or regional development agencies.
• Asking for a smaller loan, adding a co-signer, or agreeing that the guarantee is released after repayment milestones.

How a guarantee society works

A sociedad de garantía recíproca (SGR) is a financial entity that guarantees loans for small businesses. The SGR gives the bank an aval, so the bank needs fewer personal guarantees from you. A state reguarantee company covers a large share of the SGR's risk, with higher cover for new companies and innovation. This lets SGRs take on more risk.

To use one, your company becomes a member by subscribing a small amount of SGR capital. That capital is normally refundable when the guarantee is cancelled and you leave as a member. You also pay:

• a one-off study or opening fee;
• a yearly guarantee fee on the outstanding guaranteed balance.

Amounts depend on the SGR, your region, the risk and the loan term. Many regional governments subsidise the fees. Ask your regional SGR for its current figures before you commit.

How to apply

Apply to the SGR for your region directly, or ask your bank to bring one in. The bank and the SGR both assess your project, so your business plan matters. Ask the bank early whether an SGR or ICO guarantee would be accepted in place of a personal guarantee. The checklist below sets out the order of steps.

Documents you need

• Deed of incorporation of the company, as issued by the notary.

• CIF, the company's tax number.

• Identity documents of every shareholder.

• Business plan with forecasts, which you write yourself.

• Personal financial information of the founders, since the company is new.

• CIRBE report for each founder. This is a report from the Bank of Spain's credit register listing your debts.

• Evidence of your track record in the sector, if the bank asks for it.

Requirements vary by bank, so ask your bank for its exact list.

Checklist

• Ask the bank for its full list of requirements for a newly created SL.

• Prepare a business plan with forecasts and gather the founders' personal financial information.

• Request your CIRBE report from the Bank of Spain to see what the bank will see.

• Ask the bank whether it will require a personal guarantee from each founder.

• Ask whether a guarantee society (SGR) guarantee or ICO cover could replace the personal guarantee.

• Ask your regional SGR for its study fee, yearly guarantee fee and capital contribution, and whether your region subsidises them.

• Negotiate a cap on the amount or duration of any personal guarantee, or release after repayment milestones.

What if the bank asks for a personal guarantee?

Bottom line

A personal guarantee puts your own assets behind the company's loan, with no cap. It is common for new companies, but it is a choice you make in the contract, so you can negotiate it or avoid it.

What you are exposed to

Normally, as a partner in an SL (Spain's limited company), you risk only the money you put into it. A personal guarantee changes that. You answer for the debt with everything you own now and everything you acquire later.

Bank guarantees almost always give up two protections the law would otherwise offer. By default, the bank would have to pursue the company's assets first, and share the claim among co-guarantors. In a bank contract you usually agree to be jointly liable (solidario). The bank can then demand the full amount from you directly, without chasing the company first. It covers the principal, interest and costs.

Banks ask for these guarantees often on loans to new companies. The company has no track record, and limited liability leaves the bank with nothing else to claim against.

If you are married

Your matrimonial property regime decides how far the exposure reaches.

• Joint property (gananciales): your own assets are always exposed. Shared assets can also be reached in certain cases. Banks often ask your spouse to co-sign.
• Separate property (separación de bienes): only your own assets are exposed. Your spouse's assets cannot be reached.

Your spouse's consent is generally not needed for you to give a guarantee. Protection for the family home is limited. Regional civil law, for example in Catalonia, may differ, so ask a notary or lawyer before signing.

Alternatives to try before you sign

1. A mutual guarantee society (SGR). It guarantees the loan in your place, so the bank does not need your personal assets.
2. State-backed credit. Credit lines from the public lender ICO, or ICO-backed guarantees, are offered through banks. Ask your bank whether your loan can use one.
3. A cap on the guarantee. Ask for a fixed maximum amount, a time limit, or both.
4. Public or participative loans. Public lenders such as ENISA and regional development agencies offer them. A participative loan (préstamo participativo) counts as equity for the test that forces an SL to dissolve or recapitalise when losses bring net equity below half of share capital. Its interest varies with profits, and in insolvency it ranks after ordinary creditors.
5. Better terms. Ask for a smaller loan, a co-signer, or release from the guarantee once you reach repayment milestones.

Before you sign

Ask for the guarantee's amount, duration and release conditions in writing. Have a lawyer read the clause that makes you jointly liable. If the bank insists, compare its offer with at least one alternative above.

Frequently asked questions

Does my capital contribution to a guarantee society come back?

Yes, the capital you subscribe to join a guarantee society (SGR) is normally refundable when the guarantee is cancelled and you leave as a member. It is a small percentage of the guaranteed amount. The study fee and the yearly guarantee fee are not refunded.

Can I negotiate a personal guarantee instead of just accepting it?

Yes, you can negotiate it, because partners of an SL are in principle not liable beyond their capital and a personal guarantee is only a contractual choice. You can ask to cap it at a fixed amount or period, ask for release after repayment milestones, or offer collateral such as a pledged deposit.

What public financing options exist besides a guarantee society?

You can look at ICO credit lines through banks, or public and participative loans from bodies such as ENISA or regional development agencies. ICO cover can also replace the personal guarantee on a bank loan.

Where do I apply for a guarantee society guarantee?

You apply to the guarantee society of your region, or through the bank, which assesses the project.