How can someone secure his or her own investment in a business?
Posted on Feb 20, 2017 5:00am PST
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.