You may be considering expanding or adding new products or service lines in 2015. If so, borrowing money may be in your future this year (if you have not already). Today, let’s discuss an important part of the fine print in your deposit agreements with your bank.
Your checking account, in the deposit agreement, grants the bank the right to set-off (take) any money you have on deposit against any money you owe. This, of course, is only true if you have money on deposit and you owe the bank money.
So, why does this matter?
It matters because, another element of most business loans is a personal guaranty of the principals. The set off right extends to any debt over which you have responsibility. That means, if you have money on deposit in your personal deposit account and your business loan goes into default, your personal deposits may be at risk for set-off. Also, there is often no notice requirement. That means, you will not receive any warning.
One of the reasons, we talk about your legal protections for your business is to help protect your personal assets from being used to satisfy your business debts. If you are not careful, this right of your bank can create quite a problem for your business and you personally.
A simple solution is to ensure that your deposit accounts and your loans are not in the same institution, especially if your business is in trouble. Of course, you never plan to default on your loans, but sometimes things happen and you want to have the best possible chance of negotiating proper settlements if the worst occurs.
Banks want you to have your deposit accounts in the same institution, and will even offer discounts and other rewards for that. There is nothing wrong with that. Remember, you can have multiple deposit accounts. The point of today’s conversation is simply to say:
“Don’t put all of your eggs in one basket.”
Next week, we will discuss bank loans and how the signatures impact what rights the bank may have.