Titan Law PLLC

So, your business is booming, and you’ve finally secured that shiny new line of credit with your friendly neighborhood banker (or, more likely, 23 year-old cold-caller who makes commission on selling you financial products you didn’t ask for).  You’re ready to pop the champagne and toast to your success, right?  Well, before you get too comfortable in that leather executive chair, you might want to actually read those sixty pages of legal-ese you just “DocuSigned” while eating a sandwich.  As it turns out, that “partnership” with your bank is less like a supportive marriage and more like a Victorian-era melodrama where the bank plays the villain holding the mortgage over your head.

First, let’s talk about the agreed credit line (i.e., the $2 million they kept mentioning throughout the process).  You probably think you get to use that much money.  You don’t.  This is what the industry calls a “discretionary” line of credit.  Whose discretion?  Not yours.  In plain English, it means the bank provides the money when they feel like it and can stop whenever it doesn’t.  Even better, the documents often state that any “maturity date” is basically just for the bank’s convenience.  It’s a “demand” line, meaning the bank can effectively “ghost” your business and demand every cent back tomorrow just because it’s Tuesday.  It’s the ultimate “it’s not you, it’s me” breakup, except they take your car on the way out.

Then there is the “Borrowing Base” math, which is designed to ensure you never actually get the full amount anyway.  You often get some percentage (say, 80%) of your good receivables and about half the value of your inventory – minus whatever “reserves” the bank feels like dreaming up.  Got a customer who hasn’t paid in 91 days?  The bank considers that invoice radioactive and deletes it from your borrowing power.  Sold some widgets to your cousin?  Also ineligible.  The bank has the “sole discretion” to decide what’s “eligible,” which is a fancy way of saying they can give your liquidity a haircut whenever they feel a breeze.

But the real kicker is the “Unlimited Guaranty.”  If you’re the lucky winner signing this, you aren’t just a CEO; you’re a human ATM.  This isn’t a “guaranty of collection,” where the bank has to try and fail to sue the business before coming after you.  No, this is a “guaranty of payment.”  If the business misses a beat, the bank can skip the corporate entity entirely and come straight for your personal bank account, your home, and your dignity.  It’s “irrevocable, unconditional, and absolute” – words usually reserved for religious vows or Mafia blood oaths.

Think your personal savings are safe because they’re in a separate account?  Think again.  Most of these agreements include “Setoff Rights.”  This is a legal magic trick where the bank can see the money in your personal savings account and (**poof!**) make it disappear to cover a business default without even sending you a courtesy text.  They can even freeze your accounts and return your personal checks for “insufficient funds” while they decide how much they want to take.  You’ve essentially granted them a security interest in everything you own that ever touches their hands.

To wrap this nightmare in a bow, the definition of “obligations” is so broad it covers everything from the multi-million dollar loan to a random $10 overdraft or a corporate credit card fee from three years in the future.  And don’t think about arguing your case in front of a sympathetic jury of your peers.  You’ve almost certainly waived your right to a jury trial and agreed that any legal cage match will happen exclusively in New York City, which is not exactly known for its budget-friendly legal fees.

The moral of the story?  Business credit is a powerful tool, but personal guarantees are the equivalent of juggling chainsaws.  If you’re going to do it, at least keep your personal cash at a completely different bank.  That way, when the bank decides to exercise its “discretion,” they at least have to work a little harder to find your lunch money.  Be smart, read the fine print, and remember:  the bank isn’t your friend (nor is it a fiduciary who has to keep your best interest in mind).  No, it’s a bipolar roommate who owns the house and can change the locks whenever they want.

If you are in the process of investigating lines of credit for your business, ask yourself how badly you need that “peace of mind” they are selling.  Ask yourself if there are alternatives that won’t padlock your life savings and send you to the poorhouse.  Better yet, ask a lawyer to help you navigate the process.

If you’ve just read this and are now feeling a fair bit less confident than the bank’s paid mouthpiece suggested, contact Titan Law PLLC at blog@titanlawny.com.  We’ll walk you through the process.  And, don’t forget to follow us @titanlawny on Instagram.

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