Are you familiar with the term Creditor Protected Assets? For small business owners and those looking to start a small business, buy an existing business or purchase a franchise, Creditor Protected Assets are assets that are protected or “safe” in the event that a business loan goes into default. Do you know which of your assets fall into this category? If not, read on.
Most assets don’t fall into this category and can be in jeopardy, however, retirement funds are fully-protected under the law as a Creditor Protected Asset and cannot be seized in the event of a default resulting in a judgment against the loan recipient if the recipient has a Small Business Association (SBA) loan.
Let’s look at an example of how this works:
Example 1: John wants to open a small business and needs $100,000 to get started. John takes out a home equity loan and withdraws $100,000 to start his business. In two years, John closes his business and defaults on his loan.
In this case, John is now responsible for paying back the full amount of his $100,000 home equity loan or risk losing his home. His home is not protected from the loan amount due.
Example 2: John wants to open a small business and needs $100,000 to get started. He has $200,000 in his retirement funds. John starts a C-Corporation and uses $20,000 as the non-borrowed equity injection from his retirement funds to invest in this C-Corporation. He then obtains a SBA loan for the remaining $80,000 needed. In two years, John closes his business and defaults on his loan.
In this case, John loses the $20,000 he invested from his retirement funds, and still has personal responsibility for what remains of the $80,000 SBA loan he obtained. That said, however, the remaining $180,000 of John’s retirement plan assets cannot be seized to satisfy the outstanding principle balance of the loan. The rest of John’s retirement funds beyond that initial $20,000 investment are safe and not subject to seizure because retirement funds are a Creditor Protected Asset.
There are more details to consider when you consider using Creditor Protected Assets to obtain small business funding. That’s where Tenet Financial Group can help you. We’re experts in following the letter of the law and making sure you and your assets are protected every step of the way.
Contact us today to see how we can help you realize your small business ownership dreams.