Commercial Credit with an Endorser
Sometimes, the financial situation of a company is too uncertain to qualify for a new loan. As a solution, lenders can request the owners or any other individuals to personally endorse the company, meaning that they will become responsible for the loan in the event the company can't make the debt payments. The credit risk is then analyzed by combining the personal credit and commercial credit.
The payment capacity of an endorsed company is evaluated by measuring the commercial and personal debt ratio. More attention is given to the company, since it is the first entity to make the payments, but there is a direct link between the financial health of the company and the one of the shareholders.
The financial health of the endorser, which is normally the shareholder, depends on how well the company performs. It assures him salary and other kind of revenue used to pay personal obligations. Too much commercial debt will hold the financial resource needed to pay personal debt. On the other hand, too much personal debt will stress the shareholder to financially drain the company, and therefore missing in reinvesting in it. Constant reinvestment in the business is needed to stay competitive and assure its survival.
Since there is a strong correlation between the owner's personal payment behaviour and the company, the lenders will analyse the personal credit of the endorser as if he was the one paying. The personal credit score will play an important role when evaluating the goodwill of a business to reimburse a loan, but its influence varies depending on how well the company is established.
If the company has been in business for a long time, the credit analysis is based primarily on the company, but if the company is a start up, the credit analysis is then based entirely on the endorser(s).The same rule applies when taking the company's size. The larger the company, the more the credit analysis is based on the organization and the smaller it is, the more it is based on the endorser.
As we can see, commercial credit with an endorser is an interrelated credit evaluation between the business and the endorser. However, the endorser is more an incentive for the company to make the payments than a back up security to the loan, because in practice it is very hard for the lender to repay itself with the individual's personal belonging, although not impossible. If lenders wish to secure the loan, they will look into something more material.