Personal Debt Vs Outsider Debt
when I get letters to my, my online columns, I'm kind of like the Dear Abby of entrepreneurship and funding here are two top ones. Should I use my own money? And I've heard that several of you here have used your own money, take that in versus going to banks or sources of loans or how do I know when it's right for me to use debt or equity at a specific time in my business? Because remember we are the mixologists. When when should you have a little bit more debt? When should you have a little bit more equity? So let's make those two. Um, let's address these questions that make them really easy. So number one outsider debt, Okay, if you have to personally guarantee, Right, if you take $5,000 in a cash advance from a credit card, here's one thing that a lot of people may not be aware of in the fine print of that application is a little sentence that says, I personally guarantee this business loan. So even if you get a business credit card that has your logo on it and it looks so cool. You...
personally own that debt if you, that the business is not able to pay that loan back. I don't think that just because your business logo is on that credit card that you're not personally responsible. So that's an instance in which outsider debt really is your debt. Can you negotiate that away? No equipment leases any time you have to sign an application and you'll probably find it in real estate leases as well. If it's boilerplate language, I want you to look and read what it says. If you see personally guarantee, then you know, you own the debt. Very important to know, payday like loans, we're gonna be going deep into those kinds of things. Um, definitely have a personal guarantee them to them and microfinance loans. And I'm a big fan of microfinance loans, but most of them will have a personal guarantee associated with it. Now there are some types of loans where you have some negotiating flexibility but you have to negotiate for it. But be aware that the starting point of any lender will be that you are personally liable for that business obligation. Okay, suppose you go into business as half of new companies in America are formed in partnership with best friends or family members. Suppose adam you take a partner in, right? And you sign the application for a business credit card and for some reason that bill, you're unable to pay off who owns that dad? Right? Not your partner, Whoever signed yet, you can be 5050 owners, You could only own 10 of the business and your partner owns 90%. If you sign the application, you owned the entire bill, how to negotiate a better deal. You can, first of all, if a lender comes to you and says sign this guarantee and by the way, bring along your wife or your husband or your partner. Don't bring him along. Don't don't don't don't, don't say no. If you give a financial statement to a lender, I want it to be yours alone, not with your spouse, we're separating the obligations out here. If a lot of money is involved, a lawyer can work with you on it. But let's narrow the scope of the personal guarantee. Here's the most important thing if you sign alone and this is very common when I can see there are a number of product companies here where you may have assets, inventory in your business, right receivables in your business. I want you to ask that lender to make a stipulation. So if you pledge a savings account in support of that loan, I want you to insist that if something goes wrong, the lender has to turn to the inventory first, Not your savings account 1st. Does that make sense? Turn to your customers, get them to pay your bills 1st? I don't want the easy solution to go to your personal assets before your business assets. Does that make sense? You can ask for this. You can insist on this. This is all about making you smarter shoppers for cash for your business. If you don't ask, you don't get they're not going to offer it. But at that moment when your business is cooking with gas, I want you to be precision based and ask on purpose. Right can we do this? Yeah. You can even ask for to negotiate partial partial guarantees, Right. And the best way to unload a personal guarantee in lending relationships is to just move your account to another bank that wants your business. You're always shopping, always shopping for the cheapest source of cash. I just want to really emphasized that you don't always necessarily have to take the deal terms first presented to you. Okay, don't sign too fast. You may be able to get a better deal. Okay. One of those questions that I frequently get at yahoo or in incubators is G I do want to invest my own cash in my own business. How do I do it at the moment? You put your cash into your company's checking account. I want you to decide. Am I putting it in as equity or is debt? All right. I don't want you covering business things. What are you writing a personal check to cover a vendor account? Let's formalize it, especially if you're going into business with a partner. I want you to document it why? Because if you put it in as equity, I want you to price what you bought. I want you to have a certain number of shares and document the price you pay. Why? Because you're going to have a you're investing here and then it's going to be here. The IRS wants to know. So when you have that monster capital gain, you have to tell them what your profit is. You can't decide on the day of sale what the value was here. I guarantee you'll be audited and also investors like me are gonna want to know what price did you put in. So then that set the stage for what price I put in at your business. So all I'm asking is for you to make a decision am I putting in his debt? And if so I want you to do a loan agreement. It could be a one pager documented or is equity make the choice. You can convert the debt into equity. You can't convert the equity and a debt very easily. Okay. Decision time. Do it right from the start, especially if you have partners. Too many people don't. And it is a reason for investors down the road to assume you don't have your act together, gee, how do we know that you haven't, your record keeping doesn't involve other people. You're taking personal savings and putting it into your company as debt or equity. Some people, we'll go into their 401 Ks or Iras and take money out of that to put in their businesses. I never, ever, ever encourage it, recommend it. I know that is the money you never ever put into your business. Now, here's why Number one, when you pull it out before your age 55, you immediately pulling money out of 41 Ks. Iras you have a 10% penalty possibly higher to the I. R. S. That's lost cash. That's like giving money to the I. R. S. We don't do that. Why give them your free cash? No. Here's the more important reason if something goes wrong with your business. Guess what, assets in bankruptcy cord your creditors can never ever touch your retirement. So if you want to keep that safety net, keep it there. Don't touch it under any circumstances. Um if you are planning um an opportunity where you definitely know you're turning to investors for capital um in future segments, we're going to go through some ways to make sure you get to keep the biggest share of your company. One of those actions will be, I want you to set up a board of directors. So if you are investing in your business as equity, the right way to do it is once you set up your board Is to simply have your board assemble your board. Are everybody get on the phone and say I'm issuing equity. If you put $5,000 into your business, the board should approve it. That is the right way to do it. It's one of the action steps in the book about how set up your company and fund your company. But when you issue securities, two Business Partners or investors, you're incorporated or even a limited liability company, I guarantee in your company organization documents that you filed with the state is a requirement that the board approves all Issuances securities, so do it right. Have your board approve the issuance of equity if you own 100% of your company, it's not as much of a big deal, but I want to see you documenting things from the start. If you're heading the way to raise money from angel investment clubs and venture capital funds, this will be a part of your future and you can do it. It's a five minute phone call. That's all it is, and then documenting it.