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Question for the Money Doctors

Question submitted on Jun 26, 2014.

Question

I am on the board of a non-profit corporation that is looking at possible business loans. Loan agents have assured me that although they need my credit information to get an unsecured loan for the non-profit, it will not affect my personal credit score, or credit history. Is this true? What if for some unknown reason the non-profit defaults on the loan? Does it come back to haunt me?

Answer

I assume you are acting as a guarantor on the loan.   The loan is a debt of the organization, but the bank wants your guarantee in case the organization does not pay the loan.   The bank will go after you in case the organization does not pay.   This will affect your credit if you do not fulfill the guarantee if the loan is not paid.

This can be risky to you if the loan is large and the organization cannot pay it back.  Does the organization have any assets that can secure the loan?   You need to consider the organization's annual budget and that the loan payments are included in the budget.

What is the loan for?   Is it just for operations, this can be risky, especially if funding is uncertain.  Banks are willing to loan to nonprofits if there are assets that secure the loan such as real estate or equipment.

I would recommend against this due to the risk.   The organization needs to carefully review its own financial planning.


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