Finance for Non-Financial Managers and Small Business Owners

By Lawrence W. Tuller | Go to book overview

Chapter 15
Protecting Your Assets Against
a Personal Guarantee

MUCH AS I HATE TO admit it, under certain circumstances a personal guarantee makes sense, at least from a bank’s perspective. After all, most small businesses do not have an excess of unencumbered assets. Receivables, perhaps inventory, maybe a smattering of machinery and equipment, and possibly some real estate. Nine times out of ten the amount of money requested in a loan application exceeds available collateral. It would be irresponsible for a bank to make a loan under those circumstances. As a business owner, your personal guarantee may be required as additional collateral.

Unfortunately, all the banks I have dealt with usually go one step further. They demand personal guarantees regardless of the amount of business collateral. When questioned about the rationale behind such an unreasonable request, I always get the same answer: “Psychologically, a personal guarantee makes all borrowers think twice before defaulting. If they think we can take their residences, investments, bank accounts, and cars they will do everything possible to get the loan paid off.”

So, banks regard personal guarantees as a psychological deterrent to default. Well, that’s easy enough to beat. Merely design a strategy so that regardless of a bank’s actions, it cannot take away any of your assets, not your company, or your residence, or investments, or bank accounts, or cars. That’s exactly what I will show you how to do in this chapter. Once you see how easy it is to mitigate any psychological

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