A guarantee, also called a surety, is a form of security for a loan. A third party, the guarantor, promises the bank to repay the loan if you as the borrower run into payment difficulties. That lowers the bank's risk. It then becomes more willing to lend to you. In acquisition financing, this is an important building block.
A guarantee matters most when you lack your own collateral. Many successors have experience and a solid business plan, but little equity or property to pledge to the bank. This is where so-called guarantee banks step in: in Germany the state guarantee banks, in Austria and Switzerland similar development institutions.
Such a guarantee bank secures part of the bank loan, often up to 80 percent. Your house bank is then more likely to finance, because it only carries the full risk for the remaining amount. This makes financing possible that would otherwise fail due to missing equity. For the guarantee, you pay a one-time processing fee and an ongoing commission, usually a small percentage of the guaranteed sum per year.
It matters to distinguish this from a private, personal guarantee. If you personally act as guarantor for a loan, for example for the business you take over, you are liable with your entire private assets. In the worst case, that can reach your home. Be careful here. Read such contracts thoroughly and seek advice before you sign.
A guarantee is often combined with a development loan. Together they form the backbone of many succession financings for small and micro businesses, from a flower shop to a small carpentry workshop.
For business sellers
If your buyer uses a guarantee, the chances of the financing actually going through rise. That makes a successful sale more likely.
Feel free to ask during the sales process whether and how the financing is secured. A solid acquisition financing with a guarantee shows the other party is serious.
For corporate buyers
If you lack equity or bank-suitable collateral, a guarantee bank can open the door to financing in the first place. Talk early with your house bank and the responsible development institution.
Clearly distinguish between a public guarantee from a development bank and a private guarantee where you are liable with your own personal assets. Check every personal guarantee especially carefully before taking it on in the purchase agreement.
Example
A successor takes over a small tailoring shop for 120,000 euros. She brings 25,000 euros of equity, but the bank lacks further collateral. The guarantee bank secures 80 percent of the 95,000 euro bank loan. As a result, the house bank agrees, and the takeover goes ahead.
FAQ
What is the difference between a guarantee bank and a private guarantee?
A guarantee bank is a development institution that secures part of your bank loan so that the house bank finances. With a private guarantee, you are personally liable with your own assets. That is considerably riskier and should be well considered.
What does a guarantee cost?
Usually there is a one-time processing fee and an ongoing annual commission, typically a small percentage of the guaranteed sum. You should factor these costs into your business plan and your liquidity planning.
Can I finance a succession without much equity?
Yes, that is often the whole point of a guarantee. If you lack collateral, a guarantee bank can secure part of the loan. Combined with a development loan or a seller loan, financing often becomes possible anyway.
Is buying instead of founding worthwhile with a guarantee?
For many people, yes. When you take over an existing business, you buy established processes and a loyal customer base. A guarantee helps you manage the acquisition financing even if your starting capital is tight. Often a calmer path than founding from scratch.
How do I apply for a guarantee?
Usually this runs through your house bank, which forwards the application to the guarantee bank. In some cases you can approach the development institution directly. A convincing business plan and a clean due diligence of the business are decisive here.
What happens if I can't repay the loan?
Then the guarantor steps in and settles the guaranteed portion with the bank. Note: the guarantee bank may then try to recover the money from you. A guarantee does not remove your responsibility, it only lowers the risk for the bank.
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