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DEBT FINANCING

Hot Tip: Don't Make a Personal Guarantee

One small business banker says that a personal guarantee isn't always necessary.
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Don't make the mistake of pledging your personal assets to secure your business loans unless it's absolutely necessary. It often isn't, says one experienced banker we know (who asked to remain anonymous, for fear of retribution from his banker friends). An alternative, he says, is to get a separate, personal loan and then put the proceeds into the business. Here's how it works:

Let's say you need a loan of $100,000, and you have equity of $50,000 in your home and an equal amount in the business. The standard bank approach would be to offer you a business loan, backed by the combined equity of your home and business. But instead, you could ask for two loans, one secured by the house, the other by the business. A first or second mortgage on your home will be much more advantageous from a cashflow perspective, since business loans are normally written for a 1- to 3-year payback, versus the conventional 30-year term on a home mortgage. And, knock on wood, you won't be out in the cold if anything should happen to the business.

Your banker isn't likely to suggest such an arrangement, but -- if you do -- he might well go for it. If he doesn't, find another banker who will.




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