Betting the Farm
When Business Risk Becomes Personal Risk
Pop culture makes entrepreneurship look exciting and glamorous, spotlighting success stories of freedom and wealth.
Signing a personal guarantee is basically telling the lender, “I’m going to give you the keys to the kingdom.” That’s very scary. I’ve seen entrepreneurs face the consequences many times. Entrepreneurs are especially vulnerable because they’re wired for optimism, research shows. They see only the end game, thinking, I’m going to be rich, I’m going to make a lot of money in my own business, and everything is going to turn out great! Too late, many learn some lessons in the School of Hard Knocks. An estimated 9 out of 10 startups fail within their first five years. If I had to give you one rule to follow in your finances, it would be this: Never Sign Personal Guarantees! A better path is to take calculated risks. Do your homework at each stage of your business’s growth. Rather than racing ahead at top speed, slow down and proceed step by step: No. 1, is this the right decision? And No. 2, if things go sideways, am I protected? Know exactly what your downside risk is in the event that things don’t work out.
Who wants to be their own boss? Everybody.
Who wants to write their own ticket? Everybody.
The next question should be: Who wants to risk everything they own to guarantee loans to a new business that might fail?
Entrepreneurship is great. Until it’s not.
In my work, I’ve seen too many entrepreneurs fall into a financial trap. They go to the Small Business Administration or a private lender to borrow money for a new business, and before they can close the deal, the lender wants a personal guarantee. Many of them sign without thinking, assuming everything will be fine. They don’t realize that if something happens and the business can’t repay the loan, the lender is going to come after them individually! And that’s bad. The lender can seize your personal assets, savings, cars, vacation home … everything. Y ou can lose everything you worked so hard to build.
If you follow this thoughtful path, you’ll never have to learn this lesson the hard way: Entrepreneurship is great. Until it’s not.
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