Opening a business or becoming a stakeholder in an existing business can feel like swimming in shark-infested waters - especially if there's a need to acquire capital in a hurry. Let’s look at how business owners may limit their personal exposure to business debt and therefore lower their risk.

Company Structure

Move to a corporate or limited company structure - You may have started your entrepreneurial journey as a sole proprietor. As assets and projects grew in size and scope, you watched your professional liability increase.By creating a new entity - that of the corporation - owners can separate their personal assets from the company and therefore safeguard assets and savings should financial hardship affect the business.

Corporate ownership can be shared among a number of shareholders who may each have different levels of investment and participation in the business. The problem with this idea remains that somewhere along the line, in order to qualify for funding for expansion, a creditor could want to have a personal guarantee to back the offer of funding. This personal liability is again in the event that the business is not successful, and people (banks, investors) want their money back.

Often banks, investors, suppliers and other creditors aren't comfortable extending a lot of credit to a new business where only some funds may be recoverable.

Call in the strategists

Is your cash flow well managed? If the answer is no, you may find that employing your accountant to help you strategize and move your business to a financially strong position by aligning the flow of your cash in and out of your business. Cash flow management alone may be enough to fuel your expansion without requiring credit; regardless, you should attempt the discovery process to find out what steps you can take - at the very least to minimize the amount you need to borrow. While credit for growth and expansion isn’t necessarily bad, getting your cash flow management in order may by a simpler and less costly solution.

Your accountant can walk you through a forecasting procedure with best/worst/likely case scenarios, as well as identifying potential issues and pinch points in your business, as well as opportunities and areas for growth.

Wait to expand

Again, enlisting the strategic services of your accountant is critical in mapping out some potential avenues to become cash flow positive, profitable and building savings, as well as ensuring that you have a goal-heavy plan that fuels the strength of your business in the interim. Waiting until after the forecasting and discovery process is the least risky approach - however, balanced by the time frame in which you hope to expand makes each business’ situation unique.

You might even table the idea of asking for credit entirely as you and your team map a one, two or five year plan to solidify and risk-proof your business prior to obtaining funding.

Negotiate

As we discussed earlier in the article, creditors may decide that personal indemnity is required from you. This means that regardless of your business structure you’re still on the hook to pay all the debts should financial hardship impact your business.

Occasionally, this type of indemnification is required of your spouse as well, even if he or she has nothing to do with your business. Like almost every other aspect of business, you may be able to negotiate the limits of a personal guarantee as it will depend on how badly you need the funding.  It pays to make sure that you have a rock solid understanding of your business cash flow, assets and debts, and that you've looked at both the best- and worst-case 'what if' scenarios.

In the event that a personal guarantee is still required, try to negotiate on these three main factors that seem to cause stress:

‍Limit or decline the spousal indemnity - especially if they aren’t involved in the business. This might be a tough sell if your spouse is involved at all, but it’s perfectly reasonable to ask to have this condition removed if they remain separate from the business doings.

‍Clearly define the dollar amount you must guarantee - a clear definition of the amount of personal guarantee that you must put up can go a long way to helping you sleep at night. Dollar figures in this regard can range as low as a portion of your personal savings and assets (but nowhere near the value of the business if it folds). A map of how you're going to use the loan is particularly useful here.

‍Cap the length of time you must guarantee - similar to the above, having a finite timeline on which you are held personally responsible can be a reasonable negotiation with your lender. Consider a guarantee that is only 2 to 3 years, that is, the average amount of time that it takes for a business to turn a profit. The strength of your business plan can play a strong part in whether this timeline cap meets with creditor approval.

‍Consider factoring services - Factoring is a debtor service and a process by which a business ‘sells’ their invoices to a bank or specialized factoring company - either organization has the capital ability to wait the full 30, 60, or 90 days for payment from customers.

While the business pays a small percentage to the factoring company for this arrangement, they have immediate cash on hand.Discussing your unique business situation with your accountant or legal adviser, these and other tactics can help limit the personal exposure that you have to your business debt.

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