Each year, countless small business owners in need of business financing turn to the closest source at hand- their own personal assets. While these assets may be easily accessible, there is a significant amount of risk involved.
Those who are unable to to pay back the amount they invested into their businesses can suddenly find their homes, insurance policies, personal savings, and retirement accounts in jeopardy. The best way to avoid such a nightmare scenario is to engage in responsible asset protection. Here are five tips on how to protect your personal assets when funding your business:
Don’t make personal guarantees: A personal guarantee means that you agree to be personally responsible for a debt. By undertaking this kind of responsibility you are essentially losing the protection of your company’s corporation status. Be that as it may, most banks require a personal guarantee for loans. If this is the case, you can try to place a time limit on it or put up a certain asset as collateral. Avoid suppliers that demand a personal guarantee.
Get insurance: Some creditors are determined to go after your assets. In these cases, insurance protection is vital. Property insurance covers your company’s assets. Consider the option of cover exposure that goes beyond property insurance. But be aware that carriers try to avoid paying claims.
Provide liability protection in contracts: In the case of tort action or claims for fraud, your company’s corporate structure may not be able to provide adequate protection. To avoid personal liability, provide liability protection in your contracts. Be sure to include capping damages and even to disallow certain types of damages. Contracts should be signed on behalf of your company and not in your personal name.
Prepare an inventory: Regularly prepare a full list of your assets and debts. Make sure to think broadly. Don’t leave out your vacation home or retirement assets. Do you own stock in another company? Make sure these assets don’t end up being taken away in litigation.
Look into exemptions and establish protective entities: There is a possibility that some of your assets are exempt from creditor actions due to federal or state laws. These exempt assets usually include your personal home, your retirement fund and your life insurance policy. These should be the only ones registered in your name. You can set up protective entities for your other assets such as domestic trusts and offshore trusts.
Some resources to manage personal assets: