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Personal guarantees stink!!!

Old 03-09-2006, 01:59 PM
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Default Personal guarantees stink!!!

Can anyone tell me the point of being incorporated (llc) if you constantly have to put your own a$$ on the line . Just had to vent, been dealing with the bank all day.
Old 03-09-2006, 02:02 PM
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Default Re: Personal guarantees stink!!!

You can not hide behind a shell and it makes it much more difficult for you to "walk away" from a loan as you are now personally tied to it. Try to reverse the scenario, if you were lending the money, would you want some one's personal guarantee?

Be thankful you do not have to do a collateral assignment of life insurance - that one blows my mind, especially when it is used as collateral against an undrawn LOC.
Old 03-09-2006, 02:05 PM
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Default Re: Personal guarantees stink!!!

I wouldn't be upset if it wasn't a secured loan. I can understand it on unsecured, but this involves property and a building. I just don't see anything good about being a corporation. Has it helped anybody personally?
Old 03-09-2006, 02:08 PM
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Default Re: Personal guarantees stink!!!

Personal guarentee schmerentee...from a banker's perspective it's really not "collateral", right? It's just a notion of good faith that you, as the principal of the company, will stand behind your deal. The good news is that as your company flourishes, the guarentee's become less important. And, subsequently, as the company grows (along with your worth/liquidity - hopefully) a guarantee on some of the bank debt becomes less of a dent in your financial picture.

BUTTT...banks being banks, will want all the protection/collateral they can get so you probably need to get used to it or find other sources of capital.
Old 03-09-2006, 02:11 PM
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Default Re: Personal guarantees stink!!!

sumtinfishy - 3/9/2006 2:05 PM

I wouldn't be upset if it wasn't a secured loan. I can understand it on unsecured, but this involves property and a building. I just don't see anything good about being a corporation. Has it helped anybody personally?
Property and a building? If you're financing real estate, there are much more efficient markets than bank debt and it will involve, typically, no financial covenants or guarenteees...
Old 03-09-2006, 02:12 PM
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Default Re: Personal guarantees stink!!!

an LLC is not the same as being incorporated.......... LLC means you're on the line for "it" personally and incorp means the "company" is on the line.... A world of difference.......
Old 03-09-2006, 02:15 PM
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Default Re: Personal guarantees stink!!!

What do you mean it's not "collateral"? They way I understand it is, if something unfortunate was to happen to the business and the bank sold the property and the selling price did not satisfy the note, than the bank would come after me personally? Is the corp. only good for things like lawsuits? Say for instance a customer injured themselves in my store they couldn't sue me personally?

Oops, I was typing while some of you answered, BB we are a S corporation. Ebrady what are the other options?
Old 03-09-2006, 02:16 PM
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Default Re: Personal guarantees stink!!!

Bailey Boat - 3/9/2006 2:12 PM

an LLC is not the same as being incorporated.......... LLC means you're on the line for "it" personally and incorp means the "company" is on the line.... A world of difference.......
Right, but you're confusing personal guarentee for personal liability...you will probably have to provide personal guarentees in either entity.
Old 03-09-2006, 02:23 PM
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Default Re: Personal guarantees stink!!!

sumtinfishy - 3/9/2006 2:15 PM

What do you mean it's not "collateral"? They way I understand it is, if something unfortunate was to happen to the business and the bank sold the property and the selling price did not satisfy the note, than the bank would come after me personally? Is the corp. only good for things like lawsuits? Say for instance a customer injured themselves in my store they couldn't sue me personally?
You're correct that the bank would have claims on your personal assets in the above situation.

Here's why corps are good:
Limited liability: Claimants cannot come after your personal assets. Unfortunately, banks get to ask for guarentees, which does trump that...also, coporations don't protect service professionals in the same way.

Unlimited Life: the corporation is seperate from you (owners). If the owners change, the corp still exists which allows for stability. Also, this means that you can transfer equity in the company as freely as you want, to some extent it's not always easy.

Centralized Management: Means that the owners aren't necessarily the ones running the company...which is less significant in small corps.

Old 03-09-2006, 02:24 PM
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Default Re: Personal guarantees stink!!!

sumtinfishy - 3/9/2006 1:15 PM

What do you mean it's not "collateral"? They way I understand it is, if something unfortunate was to happen to the business and the bank sold the property and the selling price did not satisfy the note, than the bank would come after me personally? Is the corp. only good for things like lawsuits? Say for instance a customer injured themselves in my store they couldn't sue me personally?

Oops, I was typing while some of you answered, BB we are a S corporation. Ebrady what are the other options?
No, there are tax benefits associated with LLC's as well. For example, when I start a new development, the land is purchaed under (usually an LLC) a NEWCO LLC. I can then elect to taxed as an S corporation, which allows me to take all the profits out, as a distribution of profit, and be taxed at my Individual rate, and not subjetc to self employment tax.

Old 03-09-2006, 02:32 PM
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Default Re: Personal guarantees stink!!!

RI Builder - 3/9/2006 2:24 PM

sumtinfishy - 3/9/2006 1:15 PM

What do you mean it's not "collateral"? They way I understand it is, if something unfortunate was to happen to the business and the bank sold the property and the selling price did not satisfy the note, than the bank would come after me personally? Is the corp. only good for things like lawsuits? Say for instance a customer injured themselves in my store they couldn't sue me personally?

Oops, I was typing while some of you answered, BB we are a S corporation. Ebrady what are the other options?
No, there are tax benefits associated with LLC's as well. For example, when I start a new development, the land is purchaed under (usually an LLC) a NEWCO LLC. I can then elect to taxed as an S corporation, which allows me to take all the profits out, as a distribution of profit, and be taxed at my Individual rate, and not subjetc to self employment tax.
You're absolutely right about the individual tax treatment and the self-employment issue is still one of those, if i recall, is one of those up-in-the-air discussions...meaning some think that LLC income is net earnings from self-employment.

Depends on the type of real estate. You weren't specific, but mortgage markets (if it's income producing property or used by the business) are going to offer longer terms, fixed-rates and no covenants, through a CMBS market or life company. Of course, the attractiveness of the property and credit of the company are of issue that could increase financing costs.

Sounds like you might be involved in land/RE development which almost always carry a personal guarentee...construction is risky business, in most cases.
Old 03-09-2006, 02:46 PM
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Default Re: Personal guarantees stink!!!

EBrady:

Yes, I am a builder/developer and given my businesses capital structure, I rarely have to give a personal guarantee. Most new developments are financed with principal being re-paid pro rata with the number of overall lots. Depending on my needs and if I need the debt shield, I will often re-pay the entire line with the sale of the first lot.

I do believe that is not what the original poster was asking though. Another question for the poster is what are proceeds uses? Are you buying the building? Borrowing against it? Makes a difference for deal structure.
Old 03-09-2006, 02:57 PM
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Default Re: Personal guarantees stink!!!

As an interesting aside, when leasing cars at my company (S Corp) Mercedes requires a personal guarantee while BMW does not. We will not be leasing another Mercedes....
Old 03-09-2006, 03:05 PM
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Default Re: Personal guarantees stink!!!

This is not new const. We were buying the property and building from the owner (owner fin.) The down side was we couldn't use the equity we had built. So we decided to have the bank finance it for us, thus allowing us to use the equity at a later date. This is for retail business. I also have a line of credit (unsecured) that required a personal guarantee
Old 03-09-2006, 03:08 PM
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Default Re: Personal guarantees stink!!!

Think of it this way. Your corp right now has very little credit history. Your personal guarantee is sorta like cosigning the loan. As your corp builds a credit history, it will slowly need less and less of your personal cosigning, until it needs none.
Old 03-09-2006, 03:15 PM
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Default Re: Personal guarantees stink!!!

neckbone - 3/9/2006 3:08 PM

Think of it this way. Your corp right now has very little credit history. Your personal guarantee is sorta like cosigning the loan. As your corp builds a credit history, it will slowly need less and less of your personal cosigning, until it needs none.
See my comment above. My company is 60 years old with perfect credit and Mercedes needed a personal guarantee to lease a $95K car. Some financial institutions will always require a personal guarantee.
Old 03-09-2006, 03:46 PM
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Default Re: Personal guarantees stink!!!

I guess my gripe is that they make so hard for someone starting or in a small business. They want you to risk everything you have already worked for on a business venture where nearly half of all fail within a few years. I guess it was a good idea when I put pretty much everything we own into my wife's name, since she is not associated wth the business in any way. Btw I have owned the business for 6 yrs.
Old 03-09-2006, 04:22 PM
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Default Re: Personal guarantees stink!!!

I completely agree with you. They are making it very hard for an entrepreneur to take a risk. Now, they've lobbied for these new more restrictive bankruptcy laws, and gotten them, more and more people aren't going to be willing to take that risk with a new business. The american dream is being stomped out all around us, people.
Old 03-09-2006, 04:32 PM
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Default Re: Personal guarantees stink!!!

ebrady - 3/9/2006 2:11 PM

sumtinfishy - 3/9/2006 2:05 PM

I wouldn't be upset if it wasn't a secured loan. I can understand it on unsecured, but this involves property and a building. I just don't see anything good about being a corporation. Has it helped anybody personally?
Property and a building? If you're financing real estate, there are much more efficient markets than bank debt and it will involve, typically, no financial covenants or guarenteees...
Can you expand on this? I am about to close on a 10,000 sq/ft building and Wachovia is offering me 6.75 for 15years w/ .25 points to close.

I don't see what the big deal is about the personal guarantees. If you are worried about signing one I can see why the bank wants it. Personally, it has never bothered me.
Old 03-09-2006, 08:48 PM
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Default Re: Personal guarantees stink!!!

I am curious about the deal with putting everything in my wifes name I am 50% owner in a small residential construction business, we seem to have to personally guarantee everything, how does his work if things go bad, the first lender we delt with required our wives to sign, my wife has signed no documents with the current lender, would it make sense to move some of our assets into her name only? I have heard different ideas on the matter

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