Entrepreneurs in Illinois may have a difficult time fully separating their personal finances from those of their business, especially when they are working on starting a new company. For example, while a new business may have no credit history at all, many business owners have excellent credit scores earned through years of on-time payments and intelligent management of debt. Therefore, they may be tempted to use their personal credit as an asset when seeking credit for the business such as a bank loan.
However, business owners should also recognize that using their personal credit to secure a business loan exposes them to a greater amount of risk. Many people choose a business structure during the formation of their companies that protects their personal assets from business losses. When owners choose to put their personal credit on the line for their business, they can in some ways open themselves up once again to risk. For example, a personal guarantee is a commitment to pay back the business’ debt in case the company is unable to; this type of guarantee is frequently requested by some lenders. It essentially makes the business owner a co-signer on the business’ obligations.
People should consider the risks when they decide whether or not to sign a personal guarantee for a business loan. In general, people should aim to avoid personal guarantees, but it may be difficult so long as the business has not yet established its own credit history. In addition, some valuable opportunities like federal SBA loans require such guarantees, and these are worthwhile for many firms.
Business owners have a number of decisions to make when they work to found their companies and build them into strong firms. A business and commercial law attorney might provide advice and guidance throughout the business formation & planning process.