How can someone secure his or her own investment in a business?

Money that you loan or invest in your business is money you can easily lose. Your objective here is to reduce or eliminate the risk of losing your own investment in your business and to simultaneously create a defensible mortgage to shield your business.

First, consider the wrong way to finance your business. That’s to directly invest in your business – whether to buy the corporate shares (equity), or as a loan to your business. If your business fails you are then only a stockholder or an unsecured creditor. In either case, you’ll reclaim little or none of your investment. However, you can legally secure your investment with the assets of your business. You can then claim priority over claims of other creditors. The key is to have a bank or another lender directly make the loan to your business. Your business would pledge its assets as collateral to the lender. Your lender will lend money to your business because you have pledged enough personal assets to fully collateralize the loan so your lender has no risk. If your business fails, your lender as its secured party would be the first creditor repaid from the liquidation. With the lender repaid, it would release whatever personal assets you pledged to the bank as security. Review this plan with your attorney. An investment structured in this manner gives you two advantages: 1) Your investment is better protected; 2) you indirectly control the mortgage against your business and can better protect your business against lawsuits.