Protecting Your Personal Assets
Mark Moses
I’ve been involved with starting and running businesses for more than 25 years, including launching and growing my company, Student Painters, to more than 3,000 employees. Shortly thereafter, I grew my other business, Platinum Capital, to US$1.6 billion in annual volume. Creating successful businesses is difficult, but there’s one common thread to consider: they require capital to get off the ground, and lenders always need to find a way to hedge the risk of extending credit.
These days, signing a personal guarantee (PG) is practically an automatic requirement from lenders.
It gives your creditors the right to pursue personal assets if your business defaults on the loan. Over the course of my career, I’ve taken out more than US$200 million in business loans, and every one of them required me to sign a PG. This was never a problem until Platinum Capital had significant issues during a Wall Street liquidity crisis. We then went through a period of significant financial losses, and we could not make the payments on our credit line. We defaulted on the bank loan.
Eventually, the bank called the loan, and of course, we didn’t have the money. They threatened to foreclose on the company, my personal assets and even my home. Not fun. What I learned was to never sign a PG again. It’s just too much risk! This, however, is often unrealistic, as most banks won’t give you a credit line without a PG. To help others avoid a similar painful situation, I’ve outlined some practical steps to protect not only your personal assets, but also your peace of mind:
Manage the risk. Every entrepreneur needs to determine upfront the maximum dollar value he or she is willing and able to pay out-of-pocket, should things go south and the loan defaults.
Be prepared to negotiate the PG. While business owners often don’t have a lot of leverage in PG negotiations, it is important to seek the best possible agreement you can. Some key items to negotiate include:
- The amount of the PG
- A “burn-off ” (i.e., a reduction in the PG over time as the loan is paid down)
- A reduction in the PG amount as your business performance improves
- A “carve-out” of some assets, such as your home
- A specific end date for the PG
- What personal financial reporting is required
Consider “joint and several” liability. If a business has multiple partners, the entrepreneur needs to consider whether a “joint and several” guarantee is appropriate, or whether he or she should establish specific limitations on the guarantee liability for each partner. Under a “joint and several” scenario, the lender could pursue the personal assets of just one individual partner in a default for 100 percent of the liability, especially if his or her assets were more liquid than the others.
Get insurance for the PG. This is something no one should wait on. By the time a PG is called, it’s too late— your equity may be wiped out, your business may be in default and your personal assets aren’t protected. Having PG insurance can give entrepreneurs not only bargaining leverage, but also peace of mind.
These are just a few of the ways entrepreneurs can ensure they’re protecting their personal assets while building their businesses. Had I known about this stuff when I was starting out, I would have definitely “carved out” my home and obtained PG insurance if it was available. There’s no greater comfort than going to bed at night and not worrying about a PG.
Mark Moses is CEO of MarkMoses.Net. Visit
www.markmoses.net or e-mail Mark at
[email protected].
