The Cost of a Good Night's Sleep
The Cost of a Good Night's Sleep
Why I will never personally guarantee another loan again
This topic that I’m writing about today is something that you and everyone else will most likely go through when you’re on your acquisition journey. It will be required for you to get funding from the SBA and to some extent, from other investors and banks depending on how you structured the deal.
It’s something that will follow you for as long as there’s an outstanding balance no matter if the business succeeds, fails, or even if you live or die. It will follow you.
What I’m talking about is a personal guarantee.
A personal guarantee is a provision in your loan contract. When you agree to it, you’re taking personal responsibility for the loan if the business defaults and can’t repay it. In other words, if your business goes under or gets behind on loan payments, you are required to use personal assets to satisfy the debt.
So when you take out a loan from the SBA, you pledge your personal assets and yourself in order to pay back the debt that you took on in case things go south. Now in an ideal situation, you wouldn’t have to worry about this because your business is growing (hopefully) and flourishing, thus allowing you to pay back the loan over time and relinquish your obligations.
If the former is what happens, then you’re in luck. At least as a business owner, that’s one thing less to worry about which could help contribute to a good night’s sleep.
However, that’s not always the case and when we plant our feet back down to reality, businesses fail all the time. While an acquisition of an established business does reduce the risk of failing, that does not mean it completely rids buyers of that risk.
According to Lending Tree, 65.1% of businesses fail after 10 years.
The fact is that this still doesn’t deter most from going along this journey to better their financial state, personal dreams, or whatever else they might label it as. The problem lies when things go south. Reddit is filled with many who have openly shared their negative experiences with businesses going under and the personal guarantees that are attached to them.
These are people with serious loans with serious consequences. Not someone that lost a few thousand or tens of thousands buying speculative assets in the market because they’re degenerates.
Take a look at the example below.
“This is all so stressful. I’ve had 4 panic attacks in the past 6 months because of all this pressure.”
An all too real feeling for many who are going through the same thing. Something like that is why you lose out on sleep.
Others who have succumbed to the anxiety of having to deal with this situation, unfortunately, believe that “opting out” would rid them of the obligations and won’t put risk on their families. However, this is not the case.
A personal guarantee given to cover business debts will survive your death and is a prior charge on your estate. This means to you that your estate probate cannot be completed until such guarantees have been cancelled. This could take many months and could possibly put assets of the estate and your family at risk.
While it’s treated differently upon death, it just doesn’t go away. Your family through your estate will now have to go through all the issues and deal with the fallout. It’s so fucked up that lenders often make borrowers take out life insurance just in case in the event of death, they still get paid out.
It’s a very morbid reality in the world of small business financing.
When it comes to running a business, not only will you have to worry about the day-to-day operations, making payroll, and taking care of yourself and your family, but then truly understanding that there’s really no “optimal” way out.
I’ve personally had plenty of nights with a loss of sleep due to running a business and the feeling you get from knowing that a massive weight is on your shoulders at all times, day or night is completely and utterly terrifying.
It’s something that I want to stress to all investors that you NEED to understand what you’re getting into before “potentially” signing your life away.
There are plenty of other ways to raise capital that do not require you to get a personal guarantee and they might not keep you up at night as well.
As for me, with my personal experience and like many of those in the above image, the cost of a true night’s sleep is too expensive if not done right. The older you get too, the more you understand just how important that is.
I hope you enjoyed today’s post. If you have any general comments that you’d like me to expand on, please do so by clicking the button below and I’ll happily answer.
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Until next time,
Paul Cerro | Cedar Grove Capital
Personal Twitter: @paulcerro