Do you know your Net Worth?
The term "Net Worth" is a commonly used method to understand an individuals wealth. It's not rare to hear that an individual "has a Net Worth of $1,000,000." So how exactly do you calculate your Net Worth? To calculate your Net Worth, take the total value of the assets that you own which would include the current fair market value of your home(s), automobiles, cash in bank accounts, retirement & investment accounts, value of ownership in businesses, jewelry, recreational vehicles, and anything else you own that has value. Once you have that figure you then subtract the total debt balance of your liabilities including the balance of your home mortgage(s), balances owed on any term debt such as automobiles, balances owed on any revolving debt such as a home equity line of credit or credit cards, etc. The number you calculate from subtracting your total outstanding debts from your total assets is your Net Worth. (reminder: If you own a business do not include any assets or debts that belong to the business. In calculating your "Personal" Net Worth you only take into account "personal" assets and debts.) For example:
Cash in bank accounts: $50,000
Fair market value of your home: $500,000
Fair market value of rental properties: $500,000
Value of automobiles: $50,000
Value of retirement and investment accounts: $500,000
Jewelry & art collection: $100,000
Total Assets: $1,700,000
Mortgage balances: $250,000
Auto loan balances: $20,000
Credit card balances $30,000
Total Liabilities: $300,000
Net Worth = Total Assets: $1,700,000 - Total Liabilities: $300,000 = Net Worth $1,400,000
Why is an individuals Net Worth important to a bank/lender?
In the eyes of a traditional lender your Net Worth is just as important as your FICO.
To a lender, a strong positive Net Worth provides an additional source of repayment making your loan application look stronger. It makes the lender feel better about approving your loan request. Alternatively, a negative Net Worth hurts your loan application and identifies you as an “over-leveraged” risk.
Do you have a positive or negative Net Worth? Are you helping your credit application or hurting it?
Common misconception among business owners.
“But I incorporated because I didn’t want anything in my name personally, I don’t want to personally guarantee a business loan made to my business/corporation.”
First off, please don't say that to a banker/lender.
Second, let me let you in on a "bank secret" and the logic behind any lender or underwriter's thinking ...
Corporations don't run themselves. You, the business owner, are responsible for the corporation and it’s performance as well as the repayment of any loan that requires a personal guarantee. If you're not willing to take on the risk of a personal guarantee and stand behind and believe in your business... why would a bank or any lender?
Your Personal Financial Statement & Net Worth is just as important as your business balance sheet.
So there you have it. Your personal finances are just as important as your business finances. In the underwriting process all your personal assets and liabilities will be taken into account and will either add strength or hurt your business loan application
If you would like to discuss this further please feel free to call 619-836-0267 for a complimentary phone consultation.
- American Profit Consulting aka the Bank Whisperer