No matter what stage your business is currently in, getting a business loan with no personal guarantee can be the boost your business needs—if you can find one. While most lenders offer no personal-guarantee business loans, qualifying for one is another story.
What Is a Personal Guarantee?
A personal guarantee is a legal agreement required by lenders to protect the financial institution in case of default. The lender wants to minimize risk and therefore asks for collateral or a personal guarantee as security for repayment of the business loan. For example, businesses may be able to offer inventory or their business building (if they own it) as collateral. But, if the business’s assets are insufficient, the lender may ask for a personal guarantee, which means the business owner’s personal assets are on the line in case of default. The personally guaranteed agreement legally permits the lender to take possession of the business owner’s personal assets to recoup its losses. Long term or short-term business loans requiring collateral or personal guarantees are referred to as secured loans.
On the other hand, no collateral loans or unsecured business loans do not require any collateral or a personal guarantee for approval. Typically, traditional lenders are focused on minimizing risk and do not offer small business loans with no personal guarantee. For example, search on “Chase business loan with no personal guarantee,” and you’ll come up empty.
Even most business credit cards require personal guarantees unless the credit card issuer puts specific restrictions on the card, such as you can only use the card in a particular store. In addition, the card issuer will only consider applicants with excellent business and personal credit scores without a personal guarantee.
In a typical scenario, lenders use these agreements for small businesses with deficient credit histories for a business loan. A personal guarantee acts as a co-signer to a business loan and increases the chance of approval on an application. If the business fails and your loan defaults, you are the guarantor, and the lender has the right to come after your personal assets.
Different Types of Guarantees for Business Loans
While searching for a business loan with no personal guarantee, it’s essential to understand the different types of personal guarantees.
- Unlimited/Unconditional Guarantee. The most common personal guarantee is the unlimited personal guarantee or unconditional guarantee. This guarantee requires the borrower to be responsible for the total amount of the loan repayment, plus any legal fees. One example is the Small Business Administration’s (SBA) loan program. Many SBA loans require unlimited personal guarantees from the borrowers with a 20% or more stake in a business.
- Limited Personal Guarantee. Limited personal guarantees are more flexible and lenient. This type of guarantee limits the amount of money a lender can come after a borrower for in the event of business default. Although a limited personal guarantee sounds preferable, the limitations only apply to money. For example, failure to make payments might lead business lenders to come after other specific assets such as real estate or vehicles. There are subcategories within limited personal guarantees, such as “several guarantees” or “joint guarantees.” These types of guarantees are more common with businesses that have multiple business partners, as each partner would be required to repay a determined amount of the loan.
Pros and Cons of a Personal Guarantee
Before considering obtaining a business loan with no personal guarantee, you should understand the benefits and drawbacks of personal guarantees.
- Not having your small business loan tied to specific assets or collateral
- A personal guarantee will improve your chance of approval
- You may get better interest rates
- Risk losing personal assets in case of default
- Long-term effects (e.g., bankruptcy) if your business fails
- Stress on personal finances (e.g., bank account savings)
The good news is making a personal guarantee typically does not affect your personal credit. If you make payments on time, your credit should remain fine. However, failing to make payments or defaulting on a loan will be reflected on your credit report, which will, in turn, affect your credit score.
A personal guarantee can also be viewed as a personal loan and a personal liability. As a borrower, you must repay any business debts associated with your business. Therefore, it’s crucial to evaluate all the pros and cons to avoid harming your company and personal financial health.
Alternative Options For Business Financing
There are ways to secure a business loan with no personal guarantee. One is called a “blanket business lien,” which is like a personal guarantee, but the business’s assets are at risk and not the owner’s personal assets. The agreement states that the lender can obtain and sell the business’s assets in case of default, which can cause the company to go bankrupt or shut down.
Another option is to obtain a small business line of credit. A line of credit is a revolving business loan that allows the borrower to draw money when needed. Most businesses use a line of credit as an emergency backup plan for cash flow shortages. Like a credit card, the credit line has a predetermined limit, and fees are only attributed to the amount drawn. When the funds are repaid, the fees are zero until the next draw.
Although some lenders require personal guarantees for lines of credit, Financing Solutions does not. With the Financing Solutions Line of Credit, you not only get a business loan with no personal guarantee, but you also have the benefits of an easier application process, such as:
- There are no costs to set it up or keep it in place
- The easy 2-minute application online application
- If approved, you’ll receive a same-day, no-obligation offer letter
- The fastest setup, 48-72 hours
- Once you have the line of credit, requests for funds are wired to your bank in minutes
- You can use your line of credit whenever needed
- Inexpensive when used (low fees)
- There are no restrictions in place or collateral required
- No personal guarantee is required, either
- Financing Solutions is a leading provider of lines of credit
- We are a reputable company with an A+ & 5-star rating
- You can pay off the line whenever you are ready
- The credit line is easy to renew and renews yearly
- You have a secured account portal access 24 x 7
If you would like to see if your business would be approved and for how much, please feel free to fill out the no-obligation, 2-minute line of credit application here.