Who Holds Your Purse Strings?
Have you heard the phrase, “If you want to know who’s in charge, follow the money”? It sounds a little cynical, but upon hearing it you know there’s a kernel of truth and as a former bankruptcy attorney for business owners I saw the principle in play every day.
As you’re starting or expanding your business wisdom dictates that you keep this maxim in mind: If you want to know who’s in charge, follow the money because the person who holds the purse strings makes the decisions and it’s not always readily apparent.
Here are a few places I see business owners get tripped up:
1. Personal Guarantees.
Almost every lease and loan requires a personal guarantee. That means that you’re not only signing on behalf of the business, but on behalf of yourself as well. It’s like you’re cosigning for the business. That means if the business can’t pay, you will. Personal guarantees force more business owners into bankruptcy than any other one thing.
Imagine that you have a successful online business and you decide to open a retail location on a cute little street downtown. You sign a 3-year lease for $4,000/month. After 6 months it looks like the retail location wasn’t the best direction and you shut it down. Enter the personal guarantee and the landlord sues you for the amount left on the lease, 2.5 years at $4,000/month plus costs and attorney’s fees. Yikes, you just got a bill for $120,000. See how this gets really ugly really quickly?
Always know exactly what you’re signing and the ramifications of signing it. Generally speaking, if you’re signing a document twice on the bottom, you’re signing once on behalf of your entity (S corporation, LLC, etc.) and once for yourself – the personal guarantee.
2. Credit Cards.
Credit cards are another area I see business owners get bitten. Almost every credit card carries a personal guarantee – with the full ramifications above. Even the card is in the name of the entity. Even if you only use the card for business expenses. Even if everything, you personally owe the balance. Keep this carefully in mind as you decide how deeply you want to go into debt personally to fund your business.
3. Personal Assets.
Collateralization is another area where we see the purse strings being handed off to another entity. Collateralization is where you pledge an asset to secure a loan. I see it a lot with SBA loans (Small Business Administration). They are often secured by a house, rental property or other asset. This means that if the business can’t pay the loan, you will. Are you seeing a trend?
As you structure your business finances, don’t let excitement (or even a tinge of desperation) blind you to the full consequence of what you’re agreeing to. It may be that the risk is acceptable to you, but it broke my heart to have to deliver the bad news that not only did the business fail, the client was on the hook for the fallout. Let financial savvy guide you as you make the big decisions.
Emily Chase Smith, Esq. is an author, speaker and financial business coach based in Southern California. She’s written “The Financially Savvy Entrepreneur” and hosts Money Morsels: Small Bites of Wisdom for Entrepreneurs. Emily helps business owners make financially savvy decisions as they start and grow their business. Emily can be found at on Twitter @EmilyChaseSmith and at EmilyChaseSmith.com.
This is an article contributed to Young Upstarts and published or republished here with permission. All rights of this work belong to the authors named in the article above.