I’ll admit it: I’m a Food Network junkie. If you find Laura and me watching television at night, there’s a good chance that we’re watching a Food Network show. And one of our favorites is “Restaurant: Impossible,” where a demanding celebrity chef visits failing restaurants to make them over and teach their owners how to run their businesses properly.
So what does this have to do with your business? I think you can learn a lot from the mistakes made by the people on this show. Almost all of the business owners are deeply in debt, and almost all of them have put their homes up for collateral on their loans. They are all within months of closing, and the threat that failure represents to their families is tearing them apart.
In this series, we’ve been discussing how God’s Master Plan for your money can help guide you through financial decisions in your business. We’ve already covered the fact that debt is bad for businesses, and looked at the very few specific instances when it might be advisable for a business to borrow. Today’s lesson is built on top of that foundation: Whatever you do, don’t put your family finances at risk to take out a business loan.
There’s a lot of confusion out there about the difference between business finance and personal finance. While it’s true that legal frameworks such as LLCs help to separate your personal finances from your business dealings, they don’t always protect you when it comes to debt. Large businesses with lots of assets and revenues can often borrow against this corporate property; in your small business, though, loans that you take out may be attached to your personal finances, which leaves you personally at risk when things go wrong.
You see, banks usually require collateral when they make a loan — they want you to put up some kind of security to guarantee that they’re not going to lose their money. In the case of a mortgage, the collateral is the building itself. But if you take out a loan for your young small business, chances are that the business doesn’t have any collateral to put up against the loan. So the bank will ask you, as the business owner, to put up some personal collateral to guarantee the business loan. Many people who do this borrow against their houses… and it’s a terrible idea.
Each week on “Restaurant: Impossible” we get a new example of how this borrowing strategy can go horribly wrong. When the host/chef/boss Robert Irvine shows up, the business owners always tell him how much debt they have (often half a million dollars or more), and they say without fail that they have taken out loans against their homes. Irvine points out that if the restaurant closes, they won’t just lose the business — they’ll lose their homes as well.
The point of this show is for Irvine and his crew to ride in to the rescue of these failing restaurants, fix their food and their leadership problems, and help the owners to avoid bankruptcy. It’s entertaining and uplifting, but for most business owners, it’s not real life. And that’s where the risk comes in: While this show may help a few dozen struggling restaurants every year, there are a hundred that close for every one that gets a TV makeover. If your business gets into deep trouble, chances are that there’s no white knight coming to help you out.
When you’re a small business owner who takes out loans for your business, you’re often putting yourself on the hook for paying the loans off, no matter what happens to the company. The bank doesn’t care that your restaurant closes — they still want to be paid on the money they loaned you. And if you can’t pay them, they’ll come and take your house.
I hope you see why this is such a horrible idea. Borrowing against your home puts your family at risk. If your business fails, your family is going to lose some income (at least temporarily). But if it fails and you have to repay big loans, then your family loses not only some income, but also their home. It’s a very dangerous situation to be in. And it’s not fair to put the people who depend on you in such a risky position.
There’s always risk in business — as an entrepreneur, you know this better than anyone. When we use wisdom, we can limit that risk and keep it from affecting our families. Make the debt mistake, though, and you’re risking the future of the very people that you’ve promised to protect and provide for.
Don’t wait for some muscle-bound reality TV superhero to come in and save your family from debt mistakes. Instead, be the hero yourself, and make the right decisions from the start.
Photo by Drexel. Used under Creative Commons License.