Insulating personal assets in the event of insolvency.
In an ideal world, you probably wouldn't rush to provide personal guarantees on business loans. But these days bankers want all they can get. They want signatures -- both yours and your spouse's -- along with legal claims on houses and property. So what can business owners do to insulate personal assets in case of trouble? Jeffrey Kosberg, a Cambridge, Mass., lawyer who specializes in workouts, offers this advice.
* Don't use the same bank for all your loans. Although it sounds simpler to deal with one bank for all your personal and business needs, it also poses greater risks. A late payment on one loan could trigger a domino effect, Kosberg warns.
* If you have private investors, structure their participation as real loans. Arrange notes or mortgages on property, even if you don't expect to pay those investors back. It's likely the bank will ask for seniority ahead of relatives and friends, Kosberg says, "but at least the notes will be there."
* File a homestead. Many states permit you to file a homestead with the registry of deeds, which protects your home equity against subsequent claims up to a statutory limit.
* The entity that uses the funds should be the one that borrows. If you can't get a business loan and you end up borrowing personally for funds to use in the company, don't stop there: use the funds as collateral for a business loan. What's more, insist that the business loan be further collateralized by business assets.
* Make sure the bank has a secured interest in all business assets. If the bank doesn't have specific claims on the assets and you run into trouble, your other creditors will try to claim them. "That means you'll have less available to pay off the bank loan, which you have personally guaranteed," notes Kosberg.
* Resist bank attempts to have your spouse cosign. Without your spouse's signature, the bank will not be able to realize value from a house you and your spouse own jointly.