For many burgeoning entrepreneurs, the hardest part of starting a new business is securing enough capital to get their venture off the ground. In some cases, an inability to secure outside funding may prompt an aspiring business owner to leverage their own personal assets to get a loan. Additionally, a founder may choose to leverage personal assets in the midst of a persistent slowdown or to facilitate a critical expansion. However, because of the risks involved, the leveraging of personal assets should not be entered into lightly.
Leveraging personal assets to start a business
According to the U.S. Small Business Association, starting up a business costs between $1,000 and $30,000, depending on industry, size and whether or not the business is part of an existing franchise. Because successfully launching a new company is dependent upon having access to enough money to cover startup and operating costs, entrepreneurs often seek small dollar loans from banks, online lenders, venture capitalists and credit unions in order to launch their businesses. An entrepreneur may also consider offering up their personal assets, such as a home or car, as collateral in order to secure a loan.
Leveraging personal assets to sustain or grow a business
As this Entrepreneur article points out, a more seasoned entrepreneur may find themselves in a situation where they’re considering getting an asset-based loan to sustain or grow their business. In this situation, a business may be struggling financially due to the loss of a significant client or a persistent downturn that has left the business’s resources depleted. Alternatively, an owner could be in the position of lacking the capital to purchase new equipment or to hire new employees in order to meet a sharp increase in business.
The risks of using personal assets to support a business
The biggest risk associated with using personal assets to support a business is that you expose yourself to a serious liability. If for some reason your business cannot meet the terms of the loan, your personal possessions will be forfeited. Also, if your personal assets are connected to your business and it goes bankrupt or is subject to a lawsuit, you put yourself at risk of losing everything. Another potential hazard of mixing your personal and business assets is that you run the risk of being subject to an IRS audit. For those reasons, it is recommended that owners don’t use their personal assets to establish or sustain a business.
This article was written by Mario McKellop for CBS Small Business Pulse.