[COLUMN] Do not guarantee business loans

FIRST of all, let’s have a moment of silence in prayer for those who were killed in the massage parlors in Georgia two days ago: Delaina Ashley Yaun, Xiajie Tan, Daoyou Feng, Soon C. Park, Hyun J. Grant, Sucha Kim, Yong A. Yue, and Paul Andre Michels. Six of the eight victims were Asian women. May they rest in peace and may their families find comfort and solace with our Lord and Savior Jesus Christ. We grieve with their families in their time of sorrow.

We ask for divine protection from God Almighty, Adonai, El Shaddai, El Elohim, Yahweh, Jehovah, the creator of the Universe and everything in it, through Jesus Christ, His beloved son who died for us, from all forms of attacks against our families and loved ones because of our race and ethnicity. He is our defender. He is our protector. He is our rock eternal. He is our God, in whom we trust. Please listen to our voices in your temple, and protect our families from those who would harm us in our own beloved country, the USA, our fellow Americans. There are really some very evil people among us who are full of hate. We pray that our God changes their hearts and replaces their hatred with love.

Going back to business loans. As I have said, time and again, don’t personally guarantee business loans. If the business fails, let it fail but don’t let that business failure affect your personal assets. If you can’t get the business loan unless you personally guarantee it, then just walk away from the loan. Anyone who has been in business knows that a business will succeed or, it will fail. And the chances of it failing are much more than the business succeeding. It’s a gamble. So don’t gamble your personal assets with the fate of the business.

But of course, this advice will fall on deaf ears. When a person wants to get into business, he or she imagines the ton of money the business will be raking in month after month, year after year. He or she does not imagine the flip side of that dream, the ton of money the business will be losing month after month, year after year. This pandemic has caused a lot of businesses to fail despite the PPP loans they can no longer recover. A lot of businesses have seen their booming businesses fall flat losing more than half their revenues during the pandemic.

The client’s furniture business had $2 million of gross revenues before the pandemic, and a net profit of $2,000 a year, after paying all family members involved in the business good salaries. Their warehouse had $1 million of inventory. The first problem created by the slowdown of business was the reduction of gross revenue by a significant amount.

Warehouse rent was $20,000 a month. What do you do when gross revenue is reduced by 70% overnight? You start laying-off people. But how do you pay the rent of the warehouse? You can’t just walk away from the warehouse because your entire inventories are in it and you’ll need 30 containers to haul off the inventory. And where are you going to put the 30 containers if not in another warehouse? So you get the PPP loan of $100,000 and use that to pay rent for five months. But the five months have gone by but your sales are still flat. Maybe you can make a deal with the guy next door whose business has not been affected by the pandemic, let him give you some space in his warehouse for the time being? Maybe you can give the inventory back to your suppliers. Just ask them to pick up the merchandise? Get another PPP loan under Biden’s $1.9 trillion stimulus plan. Maybe that’s the way to go. Get another $100,000 of PPP loan and stick around for another five months. The president just declared that by May, anyone who wants to get vaccinated could get it. So hopefully, by summer, we’re over the pandemic and business really starts picking up.

In the client’s case, he has decided to call it quits. The problem is that he personally guaranteed the warehouse lease, and the lease still has three years to go. That means that he’s personally liable for $720,000. This means that the landlord will collect the $720,000 from him. So the failure of the business now affects him to the tune of $720,000. Does he have $720,000 to pay the warehouse lease? Nope.

The client will have to file his own Chapter 7 to get rid of the $720,000. He owns a house in LA with an equity of $300,000. The house has a current fair market value of $1 million.

The first mortgage balance is $700,000. So the equity is $300,000. Fortunately for the client, the new homestead exemption is now $600,000 so he can actually keep his house while getting rid of the $720,000. A fresh start in life and become productive again.

What if the client got an SBA loan for $720,000 using his house as collateral? If he did that then, he would lose his house to the SBA because the $720,000 is secured by a mortgage.

Then sorry, he is going to lose his house. This is worse than a personal guarantee.

Don’t ever use your house as collateral for a business loan. You are going to get hurt really bad if the business fails. There’s no sense in losing your house if your business fails. Please think and think again before you give your house as collateral for a business loan. This is like betting your house in a game of chance.

If you need debt relief, please set an appointment to see me. I will analyze your case personally.

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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South, Suite 10042, Alhambra, CA 91803.

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