In the spring of 2004 Valeri begin her restaurant venture with optimism and dreams of financial success creating a location that would welcome regulars and visitors alike. A modern bistro that would give her professional fulfillment and local notoriety. By the fall of 2006, her optimism had faded to dread as the bank foreclosed on her home, which she used as collateral on her small business loan.
Valeri’s mistake was not in following her passion; in fact many will say her life is richer for the experience. Her financial life, however, is far less rich as she needlessly exposed her personal financial life to destruction by providing a personal guarantee when signing for her business loans. In the end, this was her biggest mistake.
Most business owners rush into their ventures and needlessly expose their personal assets and financial future to potential disaster should their business ever fail. Continually signing for leases, business credit lines, inventory financing or working capital may provide and immediate cash infusion but will causes the following.
1 – Sleepless nights.
Capital is required to grow almost any business, and for owners not content with slow growth funded by company cash flows, outside financing is required. Though personal guarantees may be required on initial business loans, continually financing your business by providing personal guarantees will cause stress beyond which many can recover.
2 – Personal credit squeeze.
Regardless of how quickly your business grows or how strong your cash flow, at some point you will maximize your personal credit capabilities. The result will be a rapid and steep drop of your personal credit scores as you loose the ability to obtain a competitive mortgage or even gets competitive rates when you buy your next car. Eventually, you will be unable to provide additional funding for your company.
3 – Personal exposure.
Most dangerous result of providing a personal guarantee on your business financing – you never escape the personal responsibility to your lenders. This exposure jeopardizes your personal financial future!
There are options. There are steps almost any business owner can take to get additional funding for their business in the name of their company in a way that does not require a personal guarantee. There are even effective strategies that will allow you to transfer existing debts in a way to escape a personal guarantee.
This funding shifts more risk to your lending company and has the potential to raise lending rates, but as Valeri and countless business owners can attest, it is insurance money well spent.
My next 3 blogs will be in fairly rapid succession as we look at the necessary steps to arrange your business affairs in a manner that does not jeopardize your personal financial future.
