By Missuarda Sula
When you take out a loan in your business name, you probably plan on having enough steady revenue to cover the payments. When the unexpected happens — sales drop off, expenses skyrocket, or you deplete your rainy day fund — your business may not be able to shoulder the burden the way you’d hoped.
If your company can’t pay and ends up defaulting on the loan, you as the owner might be held personally liable for the repayment. However, every situation is different, and personal liability is not automatic. It will depend on the entity type you choose to operate your company and whether you agreed to be responsible for repayment when you first took out the loan.
When you are personally liable for a business loan, it means that the lender can demand repayment from you as an individual, separate from your company. They may try to recover their losses by:
Certain business types have inherent protections that shield you as the business owner from personal liability, while others don’t.
If you haven’t formally established your firm as a separate legal entity, it’s considered a sole proprietorship. You and your business are interconnected, meaning no distinction would protect your assets as an individual.
With a sole proprietorship, you’re liable for the debts your business incurs. Your creditors could go after your house, car, or other property if your business lacks adequate assets to satisfy the debt.
A business that two or more people own is considered a partnership. The amount of personal liability you have for business debts will depend on the specific partnership type you’ve formed.
The purpose of an incorporated business entity is to limit its owners’ personal financial accountability. Corporation owners, or shareholders, do not have to personally pay back an unpaid business loan if they managed the business properly.
Unless there was a commingling of funds or a shareholder agreed to be held liable for the loan, the only way a creditor can recoup their funds is through the corporation’s assets.
Owners, or members, of an LLC, have much the same legal protection as shareholders in a corporation. Members will generally not be held liable for LLC debts unless they improperly mixed personal and business funds or offered a personal guarantee for loan repayment.
Even if your business entity is set up to protect you from personal liability, your bank may ask you to make a personal guarantee — a pledge that you will pay the funds back if your company can’t. This is especially common if your small business doesn’t have the solid financials or credit history it needs to stand on its own.
High personal credit scores and possession of non-business assets that you can use as collateral for the loan will strengthen your personal guarantee — and your loan application in general. Putting your home or other property on the line can feel like a gamble, but this is often the only way for small business owners to acquire a traditional bank loan.
What if you don’t have the resources to pay for your company debts personally? Thankfully there may be a way for you to reduce or even eliminate your personal liability. Strategies to consider include filing for bankruptcy or attempting to renegotiate your debt.
If you qualify to file for Chapter 7 bankruptcy, your individual debts will be discharged, and you will not have to pay for your business-related debts personally. You will likely lose assets and have difficulty acquiring additional funding while the bankruptcy is on your credit report, so weigh your options carefully before filing for Chapter 7.
The lender trying to secure repayment may be open to negotiations if it becomes apparent that they will not receive the loan’s entire outstanding balance. Getting a partial payment is better than no payment at all, so lenders are sometimes willing to reduce a borrower’s personal liability.
The lender may be willing to:
In most cases, a small business loan will involve at least some degree of personal liability. You will likely need to put your individual assets and financial reputation on the line to get business financing from a traditional lender.
When you apply for financing through the Revenued Business Card, you can let your company’s financial record speak for itself. We examine your business bank statements to verify that your company meets the income and balance requirements. No personal collateral is required!
Find out more about the new Revenued Business Card by calling us today at (855) 943-5363.
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