Will I Have to Personally Guarantee a Bank Loan?

If you are obtaining a loan to start your business, you may believe that the business is going to be a success. Not only will you be able to earn money doing something you love on your own terms, you will also be able to make significant income. At least this is what you believe when you go to sign your loan documents.

Risks Involved in Business Loans

Of course, you would hope that the business succeeds and paying the loan will not be a problem at all. Yet, as with any business, even the most successful ones, economic factors can sometimes impact the business's income. There are many situations that you cannot possibly anticipate which could affect the business and your ability to pay the loan back in full.

If a loan happens to be a nominal amount the risk of not being able to pay it back is much lower than if the loan is for several hundred thousand dollars. When you go to personally guarantee a loan of a large amount, it is important to understand what the consequences are if problem arise that affect your ability to make payments on it. Much of the risk involved will have to do with how your business is structured.

For instance, if your business is a corporation it allows you a degree of personal protection. Any loans taken out by the corporation would be the corporation's responsibility. If there was ever a problem with paying the loans back, generally your personal assets would be protected against a lender's attempts to collect on the loan. If you put your home up as collateral for a loan as a sole proprietor, the home could be foreclosed on and repossessed by the lender. There is a difference between the risks assumed with regard to loans based upon the structure of the business.

If you have a sole proprietorship, therefore, it may be wise to consider the ramifications of personally guaranteeing a business loan. If you are putting your house up as collateral for the loan, it could be put at risk if the business fails for some reason and the loan cannot be paid back. There are many specifics which apply to business structures and the level of personal, financial responsibility that is assumed.

You will want to understand how your particular business structure may affect your personal finances. It can be helpful to consult with your business attorney or accountant to determine just how much of a personal risk your business loans could place you at. But, in general, if you are signing a personal loan to be used to fund a business you could risk losing whatever asset you place up as collateral for that loan.

This is because the lender would have a right to seek payment from you, personally if the loan is not paid back. If you are not sure how well your business will do, it might make sense to reconsider taking a large loan out in order to fund the business. You would not want to lose your business and face your home being foreclosed upon simultaneously. Yet, it could potentially happen.

Think Before you Borrow

Much of what will determine whether or not you personally guarantee a bank loan will have to do with how your company is set up. You do not necessarily have to personally guarantee a loan, but if you choose to do so it will have much to do with personal preferences. After all, some business owners are more comfortable with higher levels of risk than others.

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