Convenient financing is a must for today's small businesses.
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Without easy access to capital, everyday business functions can be a challenge and coping with seasonal cash flow fluctuations can be nearly impossible.
Yet lenders realize that businesses are, by nature, full of risks. Hard experience has taught them that when a business goes bad, lenders are among those who are left holding the bag–especially if they were foolish enough to extend an unsecured line of credit.
To protect themselves, lenders request personal guarantees for a business lines of credit. If the business becomes insolvent, the loan balance is covered by the personal assets and future earnings of the business owner and her spouse.
Locating no personal guarantee business lines of credit isn't easy to do. In the current financial environment, lenders want to protect their investment as much as possible. But it may be possible to manage the impact of personal guarantees and launch a strategy that will eventually let you avoid personal guarantees altogether. Here's what it involves:
- Learning to live with personal guarantees. If you are the owner of a start up small business or a small business without a lengthy track record of profitability, you'll simply have to accept the reality that you'll need to provide a personal guarantee for a business line of credit. That's not to say that you will always have to provide a personal guarantee, but until you've established a track record they are something you'll have to live with.
- Limit borrowing. Since you're probably going to have to provide a personal guarantee on your business financing (at least for now), the best way to limit your exposure is to limit your borrowing. A certain amount of business borrowing is necessary and helpful. But don't borrow more than you can afford to lose personally. Remember, the personal guarantee means that every dollar the business borrows is a dollar that could potentially be repaid from your personal assets.
- Slowly establish independence. The process for establishing an independent borrowing identity for your business is slow, but effective. It begins by incorporating the business and establishing it as a separate legal entity. Next, set up credit accounts with local trade suppliers like print shops or supply stores. These accounts will help establish a credit history for the corporation, but you'll also want to make sure that the business is listed with the major business credit reporting agencies. With a little credit history under your belt, you should be able to get approved for small store credit cards and over time, work your way up to a no personal guarantee business line of credit.