The risks of securing a business loan with personal assets

Securing a business loan with personal assets is a tricky deal. Many new entrepreneurs want to start out a new business, but don't have anything to secure a loan, so they turn to their personal assets. This type of funding strategy is good and bad. A business loan with personal assets can secure the much needed funds for the company. On the flip side, if your credit line is suspended due to financial problems, the bank can come after all your personal assets to pay off the loan balance.

Securing a business loan with personal assets should be viewed as a temporary solution for funding. It is not a good long-term approach for the business. Once your business is producing profits, talk to your lender about changing the business loan and removing your personal assets from the loan. There are many risks when funding a business. Involving your personal assets only adds to the risk and it can complicate personal risk by reducing insurance or retirement benefits. The worst risk is the status of your primary residence.

Borrowing money against personal savings, retirement plans and your primary residence can be an easy way to get much needed cash. However, borrowing this money for business use is hard. It makes it difficult for tax purposes as you have to sort out personal assets from business assets. Having legal documentation between the company and your personal assets is important as well.

The worst risk of securing a business loan with personal assets is that if your business is no longer around, you are still responsible for making those monthly payments. If you keep getting bank rejections for loans, you might try a home-equity line of credit or loan against your life insurance. You will pay a smaller interest rate, but you need to be careful if you bankroll your house with your business.

Several states have passed laws about your personal assets being seized if your business goes bankrupt. Most of the larger assets like your home are protected, but this could change. The Enron scandal sparked a large debate in Congress and has legislation considering limiting home protection to $125,000.

Another popular method of securing a business loan is by using personal credit cards. This too should be a last resort method. If your company is this small and you are using personal credit cards to finance it, you may want to re-think starting the business or start looking for a partnership with another company until you can break away and form your own company.

Playing it smart from the start is the best method. Start out by registering your business as a corporation or a limited liability company.Don't pay your personal bills with the same account you use for your business. Never take money from the business to purchase personal expenses such as a house or a car. Decide in the beginning exactly how much money you want to take out for a business loan and stick to it. Find the cash flow to pay the monthly payment before you apply for a business loan.

Before you ever sign those application papers on a loan; make sure you know what you are getting into. Read the fine print and make sure your personal assets won't be at risk when you are securing a business loan. Not only will it be hard to recover from the business falling into default, but your personal assets will suffer the consequences as well. Always look at all the options before looking at your personal assets. They should be considered a last resort for funding a business.