Should you be part of a large investment group and guarantee a large loan for a business deal?
It depends on a number of factors:
- How deep are the pockets of the other investors? (Or are they perhaps inviting you to the party because of your deep pockets?)
- Could you afford to risk losing your entire investment?
- How much sleep do you lose when you engage in such deals?
- If the deal goes south, do you know how much you’d be on the hook for?
- If all the other investors come up short on cash at the same time…will you be asked to guarantee only a portion of the loan or the whole thing?
Remember, when farmer Brown comes into the barnyard with a hatchet in his hand, not all the chickens are at risk…just the fat ones.
Consider the case of Mark Brunell. He was a three-time Pro Bowl quarterback in the NFL. He actually won a Super Bowl ring with the New Orleans Saints in 2009 while playing backup to Drew Brees.
Brunell threw 30 passes that season—for which he was paid a cool $1.6 million. (Nice work if you get it, right?)
But that pay is nothing compared to his earlier contracts. According to overthecap.com, Brunell earned more than $70 million playing in the NFL.
Yet in 2010, he filed for Chapter 11 bankruptcy protection.
The Wall Street Journal reported that “personal guarantees of numerous business loans contributed to…Brunell’s Chapter 11 filing…In court papers, he listed $5.5 million in assets and debts of $24.7 million.”
Bankruptcy laws play an important role in our society, encouraging capitalists to put their capital at risk. These laws don’t eliminate risk (ask anyone who’s been through the process), but they can soften the blow and, in some circumstances, provide room to breathe and, ultimately, recover.
Brunell joined a long list of famous individuals who have declared bankruptcy at some point in their lives: Mark Twain, Henry Ford, Henry John Heinz (the ketchup king), Milton Hershey (the chocolate titan), Walt Disney, and former President Donald Trump—to name just a few.
I personally have known multiple individuals who have gone through the bankruptcy process. Each one would tell you it was one of the most difficult events of their lives.
In every case I’ve seen—where loan guarantees were more or less blindly-signed—the basis of the deal was a personal relationship. It was some version of “My buddies were all getting into this deal together, and I wanted to go along for the ride.”
Here are some questions to ask yourself before you guarantee a business loan:
- Do I really understand this deal?
- Why am I being asked to participate?
- Have I sought counsel from my attorney and financial advisor?
- Do I understand the worst-case scenario here and am I willing to take that big of a risk?
- Are the others in this deal really wise…or simply persuasive?
Americans are natural risk takers. That’s a good thing.
But taking a risk without understanding that risk is a dumb thing.
You need to ask a lot of questions.
Speaking of questions, I meet people all the time (especially those in their late 50s, early 60s), who have questions about retirement finances.
You’re smart to ask those questions. But make sure you’re asking ALL the right ones. Email me at email@example.com, and I’ll send you my free list of “30-Something Questions for People Who Are 60-Something.”
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