Bible Finance

Manage Your Money God's Way

Avoiding Surety for Company Loans

God’s Word warns of the dangers of signing surety, which includes a situation in which a company owner gives a personal guarantee for the company’s debt. By refusing to give a personal guarantee for company debt, you will effectively protect your family’s assets, such as your home, retirement fund, etc. The objective is not to avoid paying your obligations, but rather to limit your risk and the potential negative consequences if something goes wrong. If you do not provide personal guarantees, and if the company does have a bad year, you will be in a much better negotiating position with your bank.
Although financial institutions generally ask for personal guarantees, it is definitely possible to obtain a business bank loan without signing surety. If your company has a lot of debt, it may take a few years for you to convince the lender to release you from your personal guarantee. However, it is possible fundamentally because all things are possible with God, and it is clearly God’s desire that you do not sign surety.
The following are some practical suggestions to avoid signing surety.
1. Build sufficient retained earnings in your company with the objective of negotiating the release of your personal guarantees.
2. Develop and implement a personal budget in order to minimize your salary from the company so that you are able to build the retained earnings of the company faster.
3. Another option is to obtain equity investors, who generally do not require personal guarantees because the nature of their investment is equity, not a loan. To do this, you will have to give up a portion of the ownership of your business. If your company has significant debt, the use of equity investors is a much safer way to finance your business. Also, when the company has a bad year, equity investors are your partners, who want to help, whereas a bank generally is focused on protecting its position.
4. Frankly, the best option is to develop and implement a plan to reduce and eliminate your company’s indebtedness. God warns of the dangers of borrowing (Proverbs 22:7), and every reference to borrowing in the Bible is a negative one. I firmly believe that the God of this universe does not need a bank in order for God to bless a business. Over the past 23 years, I have been blessed by God with the privilege of assisting approximately 200 businesses and families become debt-free both corporately and personally.
Philippians 4:19 states, “And my God will meet all your needs according to his glorious riches in Christ Jesus.” Please note that it is God himself who promises to meet our needs—God does not need the bank.
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March 18, 2008 Posted by | Cosigning/Surety | , , , , , | Leave a comment

Personal Guarantees for a Business Loan

During the mid-1980s, it took about three years for me to convince a Christian businessman that giving his personal guarantee in regard to his company’s bank loan was inconsistent with what God’s Word said about surety.
The issue of surety (guaranteeing payment of a debt for another) arises when one takes on a financial obligation without a certain way to pay. When the owner of a company gives a personal guarantee in regard to the company’s debt, that person assumes that the company will be profitable enough and have sufficient cash flow to service the debt—without the debt falling back onto the personal guarantor. God warns us that we do not know what will happen tomorrow. James states,
Now listen, you who say, “Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.” Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. Instead, you ought to say, “If it is the Lord’s will, we will live and do this or that. (James 4:13–15)
Although it is commonplace for the owner of a company to provide a personal guarantee in respect of the company’s bank loans, the past 30 years have shown that many businesspeople have lost their homes when their businesses incurred losses and the bank took legal action against them. God warns that if you sign surety for debts, then your “bed” (i.e., your home) may be taken from you. “Do not be one of those who shakes hands in a pledge, one of those who is surety for debts; If you have nothing with which to pay, Why should he take away your bed from under you?” (Proverbs 22:26, 27 nkjv, emphasis added)
I was finally able to convince that businessman I mentioned that signing personal guarantees is inconsistent with God’s Word. As a result, he negotiated a deal with his bank by which he did not have to provide personal guarantees. From 1990 until 1995, there was a severe recession. His business became insolvent, and the bank took legal action. However, because he had not provided any personal guarantees, his personal assets were protected, and today he enjoys a good retirement. On the other hand, if he had continued to give personal guarantees, he would have been forced into personal bankruptcy and lost everything, including his home, retirement fund, etc.
Avoiding surety is a biblical principle. It is not a sin to sign surety. However, God warns that if you sign surety, you may very well suffer some negative consequences. Unfortunately, over the past 30 years or so, many businesspeople (frequently including their spouses) have personally guaranteed their company’s bank loans and lost everything when the company got into financial difficulty.
In summary, God warns of the dangers of signing surety, one form of which is for a business owner to give a personal guarantee in regard to the company’s bank loans.

February 25, 2008 Posted by | Cosigning/Surety | , , , , | Leave a comment

What If You Have Already Cosigned a Loan?

Statistics demonstrate that in more than 50 percent of  instances when someone has cosigned, it is the cosigner, not the borrower, who ends up paying the loan. If you have already cosigned for a loan, I strongly recommend that you take the advice given by God to do everything possible to free yourself from the financial obligation related to cosigning. Proverbs 6:1–5 states,
My son, if you have put up security for your neighbour, if you have struck hands in pledge for another, if you have been trapped by what you said, ensnared by the words of your mouth, then do this, my son, to free yourself,… press your plea with your neighbor! Allow no sleep to your eyes, no slumber to your eyelids. Free yourself, like a gazelle from the hand of the hunter, like a bird from the snare of the fowler.
The words “have struck hands in pledge for another” mean that you have shaken hands confirming that you are responsible for the financial obligation of some one else.
God’s Word is clear that if you have cosigned for someone else, you should do everything possible to free yourself from that responsibility. Here are some practical suggestions to do this.
First, I recommend that you spend some quality time in prayer acknowledging that you have violated one of God’s principles and asking God to provide a way for you to free yourself from the “cosigning obligation.” In some cases, that will require a miracle from God.
Next, I suggest that you approach the lender and see if it is possible to free yourself from the legal obligation. However, unless the borrower’s credit rating or assets have improved significantly since the loan was taken out, most lenders will not release a cosigner.
Another option would be to see whether you can find another financial institution that would lend money to the borrower with no cosigner. Once this is accomplished, you could have the borrower use the funds from this loan to pay off the original loan that you cosigned.
Generally, if a lending institution has requested a cosigner in the first place, there is a high probability that the borrower was not a good credit risk. Frequently, people are not a good credit risk because historically they have not managed their money well. If this is the case, you can certainly reduce your risk of being liable for the loan by encouraging and assisting the borrower in managing his or her finances. I strongly recommend the materials provided by Crown Financial Ministries, whose focus is to teach God’s Word on managing money. The web site is www.Crown.org or click the link under Blogroll.
Proverbs 11:15 states, “He who puts up security for another will surely suffer, but whoever refuses to strike hands in pledge is safe.”

February 13, 2008 Posted by | Cosigning/Surety | , , , , | Leave a comment

Cosigning for Loans

Several years ago I received a phone call from a woman who indicated that the bank had just taken a significant portion of her and her husband’s retirement fund to pay off a loan for which they had cosigned with their son. Without understanding the implications, the parents had cosigned for a loan for their son and daughter-in-law. After the son and his wife had missed two or three payments, the bank lost patience, legally demanded the loan, and unilaterally used the cosigners’ money to pay it off. As well as losing a lot of money, Mom and Dad lost the good relationship they had had with their son and daughter-in-law, who felt guilty because of what happened. Invitations for dinner were turned down, and both parties at best found it awkward when they got together, because of the significant strain that cosigning had put on the relationship.
In my experience, most Christians are not aware that God’s Word strongly advises against cosigning. The terminology for cosigning that is used in the book of Proverbs is to “strike hands in pledge.” It’s important to understand that at the time the book of Proverbs was written, they did not have lengthy legal documents for their agreements; a handshake was sufficient. “To strike hands in pledge” meant to shake hands in the process of making a pledge to pay a financial obligation.
God warns that if you strike hands in pledge or cosign for a debt, something very negative could happen to you. Proverbs 22:26, 27 states, “Do not be a man who strikes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you” (emphasis added). I believe that an appropriate contemporary  analogy to having “your bed snatched out from under you” would be to lose something valuable to you, such as your home or part of your retirement fund.
God’s Word in regard to cosigning is a principle, not a law. It is not a sin to cosign, but God warns that if you cosign, you may suffer negative consequences. Proverbs 17:18 is very clear regarding risks of cosigning: “A man lacking judgment strikes hands in pledge and puts up security for his neighbor.”
The policy that my wife and I have established is to never cosign for anyone, regardless of the circumstances. If a friend or relative has a real need, we will pray, and, if directed by God, we will give the person the money. I believe another option is to simply lend your own money to the individual for that need-with the mindset that you are prepared to forgive the loan if need be. (See Luke 6:35.) If you follow one of these two policies, you will have effectively advanced the funds to the friend or relative on a “free-will basis” rather than being forced to provide the money when the bank takes legal action against you as the cosigner because the borrower has defaulted on the loan.
In short, if there is a real need, and if you give or lend the money (being willing to forgive the debt), then generally the relationship will remain intact. In addition, you will retain your own peace of mind, as you will not end up in a stressful situation where you are legally forced to pay off the debt.

February 2, 2008 Posted by | Cosigning/Surety | , , , , , , , , , , | 2 Comments