Protecting Yourself and Business Loans

When you're shopping for a business loan, also consider the importance of protection. This involves asset protection, and perhaps a personal guaranty for your commercial loan. You'll also need to pay attention to all of your business loan terms. Let's examine each of these in some detail.

Business Loan: Asset Protection

A comprehensive protection plan is just as important for a small business owner as the large, multi-national corporation. Your business has assets that you want to ensure are protected. There are three basic strategies to do so.

  1. Effective exemption planning - Understanding how you can lose your assets to creditors is the first step in developing your business strategy to protect them. One way is exemption planning of your assets, and how they can be protected even in the event of bankruptcy. You can also legally transfer and protect your assets, and avoid the challenge by a creditor for those assets. Asset protection trusts are another possibility that, although complicated, offer additional asset protection
  2. Strategic limitation of liability - Helpful at the formation of a business, this strategy can also be applied to an existing business. Basically, the type of business entity, when and where you formed it, how and where you obtain financing or funding for the business, is where you want to limit your liability. In addition, your business structure should seek to minimize income and estate taxes by the government.
  3. Avoid or limit day-to-day risk exposure - To the extent that you can, don't leave assets in the business vulnerable to seizure after a default on a contract or business loan, or as a result of a negligent act. Another aspect of this strategy is to carry enough insurance to protect your assets.
Business Loan: Personal Guaranty

A personal guarantee is typically required by a commercial loan lender or bank for small businesses without a track record or sufficient assets to back the loan. The personal guarantee is your promise to the lending institution that if you fail to pay back your business loan, you are responsible for the loan default through your personal assets (your home, car, cash, and so on). Protecting yourself in the event that the lender requires a personal guaranty means you, and your attorney, need to go over every document with rigorous scrutiny. You may wish to consider small business loan instruments such as unsecured loans that do not require collateral.

Business Loan: Paying Attention to Those Business Loan Terms

Business owners can quickly get into trouble if they neglect to pay attention to the fine print contained in the business loan terms and conditions. That's a recipe for disaster. Read everything in the loan agreement before you commit to it. Make sure the interest rate you were quoted and agreed to is the same rate that appears on the document. Also check the length of the term. Note any stipulations, fees, penalties for late payment, grace period, and other important terms.

Consider Different Types of Financing

Finally, protecting yourself and your business loan means thoroughly investigating what's available to the small business owner. You may opt for equity financing with the help of investors (who own a piece of your business and are paid when it makes a profit), or debt financing (you take out a loan), or even a Small Business Administration (SBA) small business loan. Be sure you leave yourself enough cash and personal equity that you have sufficient funds to withstand some market volatility and a downturn in your business. What most likely will happen is that you will utilize a variety of financing sources as you grow your business. Just be sure you build in protection along the way.