In the early 1980’s, serial entrepreneurand his wife Barbara faced difficult times when his bank called loans that Fontaine had personally guaranteed.
“I never dreamed (or chose not to acknowledge) that I was putting our entire net worth at risk. I learned the hard way that personal guarantees put the guarantor at real risk. Of course, I also didn’t foresee a 21% prime rate.”
After the bank called his business loans, Dick brought the family together for a conference. His teen-age daughter was less worried about dinner next month than her fashion image, saying “This won’t affect my clothing budget, will it, Dad?”
Different Pockets for Family Assets
Wife Barbara had more serious and long-term concerns. She advocated this division for family assets going forward:
“A” = Keeps you off welfare
“B” = Keeps you to the lifestyle you are accustomed, i.e. new car ever so often, vacations, kids’ schooling, etc
“C“ = “Las Vegas” money to be used for entrepreneurial projects, especially if it looks like it is going into a black hole.
Years later, when Fontaine became an adjunct professor of entrepreneurship at Westminster College in Salt Lake City, he invited Barbara to talk to his classes. She told prospective entrepreneurs that risks they take can impact their families in unexpected ways. To avoid these problems, she advised them to make the A, B, and C divisions for family assets.
After his experience, Fontaine has not personally guaranteed any more business loans. Here are his recommendations for today’s entrepreneurs:
“Treat loan guarantees as a cash investment. Better yet, avoid them If you’re required to provide them, negotiate an event-triggered or time-triggered release from the guarantee in writing from the lender going in.”
But Fontaine also believes that “losing all your money is not the worst thing in the world. It forces you to examine the priorities in your life, teaches you what’s really important, tests you in important ways, and is appropriately humbling.”
I am honored to have met the Fontaines on a trip to Alaska’s Glacier Bay, pictured above.
Entrepreneurs should be careful with loan guarantees and should maintain personal reserves of cash and assets, regardless of their passion for their business. SCORE counselors can help you assess your risks. In fact, SCORE Chicago’s mission includes risk counseling:
…we not only help entrepreneurs realize their dreams of success, but also help entrepreneurs understand the risks and commitment required to start a business. Success can be measured in insuring clients don’t risk their future by putting all their resources into business ventures that have no chance of success.
How do you think about risking personal assets in your business? Please share your thoughts in a post.
Business Owner’s Toolkit: Personal Guarantees