Monday, March 30, 2009

The Great Temptation - Why Personal Guarantees Are a Bad Idea

No matter where you are in your career, you will have, at one point or another, been tempted to give a personal guarantee. Maybe you feel like it's the only way to get started. Or maybe you know that the value of your home is the only way that you can catapult your business up to the next level. But, as my Great Uncle Sylvester used to say, "Personal guarantors are penniless. Some of them just haven't gotten there yet."

For many business considerations, you have to really be an expert to understand the nuance of your particular situation as it pertains to the issue at hand. Luckily for you, there's only one thing you have to understand here: putting up a personal guarantee is never a good idea. Ever. If you truly need to rely on your personal assets to secure a business proposition, you cannot go forward with that deal.

There are three common career points when someone is tempted to sign a personal guarantee. When you are first starting out, you want to get your business started, and the only way to do that is with a big loan. But a bank won't loan you money unless you put up your home or other assets. In the second common scenario, you feel like your established business could really grow if only you had the cash on hand to make a big deal, whether that deal is a new piece of equipment or a prime property that seems like a cash cow. The final common scenario is the worst of all-- your business is failing or going through a tough time, and you need some cash in order to get through the lean time. If you put up your personal assets, you think you can see through to future profitability.

In all three of these scenarios, the same principal applies. The bank won't issue a loan because they don't feel that the business model is a sure enough bet for them to lay out the cash. In truth, there is a large number of potential risks that may be good bets, and yet which don't meet the cautious bank's criteria for a safe investment. But you have to ask yourself-- do you want to be less careful with your family's future than the bank? The answer should be a resounding no. You either have to find an investor, or give up on the idea.

The sole exception to this is when the amount of money in your personal guarantee is an amount that you can afford to lose. This scenario is, sadly, not usually the case, but if it happens to be the situation here, then, of course, it's your money to risk. Just don't bet the family home on a business deal.

Be sure to read up on Asset Protection since it is an extremely important part of your Real Estate Investing plan.

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