Paying business debts before home mortgages, Part II
Posted by: John Tozzi on September 11, 2008
Just a brief follow-up on the item I posted Monday on how business owners are paying their commercial debts even as many fall behind on home loans. In the comments, Carol makes a good point: that for franchise owners, there’s often not much of a choice.
[T]hose small retail franchise business owners who have used SBA Loans to finance the startup of their franchised businesses will always pay FIRST their SBA Loan and royalties to the franchisor, and their lease payment to the business Landlord, and their debt to suppliers, because if they default on their business loan or their lease or the royalry payment to the franchisor (assessed on their gross sales and NOT on their profits) they will lose everything invested in their business almost immediately under the terms of the contracts they have signed with the franchisors. Franchisees are required to sign personal guarantees to get business loans and to post collateral and when they lose their businesses they often lose their homes, as well.
Maybe there’s a similar calculation for any business owners who have personally guaranteed business debts. If they default on their business payments, they risk their personal assets as well. So if they’re forced to choose, they’ll pay the commercial debts first to at least keep the business alive, even at the risk of losing their homes.
But the point about franchisees is worth noting. They face more in up-front costs and royalty payments than independent businesses. Many may not be choosing to pay their business debts first so much as they’re backed into doing so.