Forums: Discussions for entrepreneurs and small business.

My husband is trying to start a business that requires around $450K in funding. He hasn't been able to find investors. He wants to use all of our personal assets-- home equity, 401k, and cash-- as collateral to secure a bank loan. He has not done any saving with starting a business in mind, so all of the cash we'd be putting up as collateral is literally just our regular savings account. Our total assets do not add up to $450k.

I am uncomfortable with this. He says it is a risk that successful business owners take.

I am also uncomfortable because his plan, once securing financing, is to quit his job and draw a salary from the business loan as he runs the business.

I don't know anything about starting a business. Is all of this pretty much normal procedure? It sounds like a disaster in the making to me. I have tried to research it online but I just can't find enough detailed information.

My husband is trying to start a business that requires around $450K in funding. He hasn't been able to find investors. He wants to use all of our personal assets-- home equity, 401k, and cash-- as collateral to secure a bank loan. He has not done any saving with starting a business in mind, so all of the cash we'd be putting up as collateral is literally just our regular savings account. Our total assets do not add up to $450k.

I am uncomfortable with this. He says it is a risk that successful business owners take.

I am also uncomfortable because his plan, once securing financing, is to quit his job and draw a salary from the business loan as he runs the business.

I don't know anything about starting a business. Is all of this pretty much normal procedure? It sounds like a disaster in the making to me. I have tried to research it online but I just can't find enough detailed information.

You're right to be uncomfortable! You should have several months worth of savings to live off of while starting the business.

Does he have a business plan?

At what point does the business start generating cash to both pay back the loan and for you to pay living expenses?

Most imporant of all - what is Plan B? If things in the business start to "go south," then what?

Most business startups fail. Why will this be any different? Not that we hope you fail, but those are just the facts. He is right that most successful business owners take risks, but the risks are ones that they are comfortable with.

To put it another way, if you lost your wallet and the money in it, at what point (how much money) would you be upset with losing? 

Ed Baloga, CPA / MBA
Principal CFO
Baloga Associates
ebaloga@baloga-associates.com
www.twitter.com/edbaloga

Blaise63,

While it is true that some small business people are willing to "bet the farm" on their business - I don't recommend it and it certainly isn't necessary as a "badge of honor".

Furthermore, when I'm advising entrepreneurs - I want to make sure the family (especially the spouse) is in full agreement with the game plan. The second thing that I counsel them about is "getting their personal financial house in order"

I don't know what kind of business he plans to start - but many require a full time concentration from the beginning, so it's not uncommon for the founder to plan to leave his/her employment to dedicate their total time to the new business. On the other hand, one can often "keep the day job" for a longer period until the business is ready /able to generate revenue.

You say he hasn't been able to find investors. There can be a number of reasons for this and thus might be worth looking into.

If you and/or your husband want to discuss the specifics of your situation, feel free to contact me directly.

Pledging all your personal assets is an extremely bad idea and I would not recommend it. While he is right that successful businesses takes risks but successful entrepreneurs are also smart and they do not risk losing absolutely everything especially if they have a family as well. You can think of using any one of your major assets but not all. Also if a VC is not ready to fund the company at all, then there could be a flaw with the business plan. Make sure the business plan is foolproof and try to gage interest from VCs. If they are not ready to fund even a single dollar, then something could be wrong.

You may have a home full of possessions that would likely fetch a pretty penny, but why sell them when you can offer them as collateral for secured loans?