No Personal Guarantee Small Business Loans
All businesses need an infusion of capital from one time or another, but often, business loans are out of reach for the average small business. Why? Because they often require perfect personal credit scores and/or huge deposits or guarantees.
If you’re thinking about getting a business loan, but want to avoid putting your personal possessions like your home on the line, you aren’t alone. Below, we’ll take a closer look at whether a no-personal-guarantee business loan is possible for you and your business.
What Does No Personal Guarantee Mean?
Many small business loans, particularly unsecured loans, require the business owner(s) to personally guarantee the loan amount so that if the payments can’t be met by the business, the loan company can get their money back. Should the business fail, your house, car, and other assets may be at risk, depending on the terms of the guarantee.
If you are the sole owner of the business, you will likely have to sign an unlimited personal guarantee. This makes you wholly liable for the entire amount, principal plus interest, should the worst happen. In the case of multiple owners, it is more likely that each will have to sign a limited personal guarantee. Each partner in the business is allotted a percentage of the loan amount, and your liability is restricted to that share.
For many, this is an uncomfortable burden to bear. The idea that you may lose your home because the business gets into financial difficulties can become a constant worry and prevents many from ever borrowing money for growth.
A loan that doesn’t require a personal guarantee may be more difficult to find than normal and may cost more, but the peace of mind is often worth those extra dollars. No personal guarantee business loans, where you are not liable for repayment problems, may sound like an impossible dream, but they are out there.
What Are Unsecured Business Loans?
Simply, an unsecured business loan is one that doesn’t require assets as security. With a secured loan, if the borrower has financial problems, the lender can sell its assets to recoup their money. This is not the case with an unsecured loan. This added risk is why most unsecured loans are more expensive.
Traditional banks may be shy of offering unsecured loans, but alternative finance providers are often more than happy to consider the unsecured option. Some, indeed, are prepared to advance six-figure sums to the right borrower, as much as $250,000 in certain circumstances.
Be warned that your business’s track record will be under close scrutiny and that many of these lenders will require a personal guarantee from the owners or a blanket lien on all the assets of the business. A blanket lien is common enough in business financing and shouldn’t unduly alarm you, but you should understand what it means before you sign an agreement.
What Are the Advantages of Unsecured Business Loans?
While these loans often cost more to borrow, the majority of unsecured loans are very fast to organize as the application and approval process is streamlined, and upfront costs are low or, in some cases, absent. This means you can have the money and continue making progress as soon as possible.
Of course, the biggest benefit is that you aren’t putting an asset at risk. However, it is worth noting that this doesn’t mean you’re untouchable should you stop repaying your loan, lenders can still come after you via legal channels, they just can’t take ownership of your possessions.
Can I Get a Business Loan Without a Personal Guarantee?
Is a business loan without a personal guarantee a dream? No, but they are rare, and you will have better luck if you look to other forms of financing, like invoice financing and business lines of credit.
With invoice financing, you essentially use your unpaid invoices as collateral.
There are two main forms of invoice financing:
- Invoice discounting: where the lender advances up to 95% of the invoice value. When your customers pay the invoice, you pay back the finance company the amount they lent you plus a fee and/or interest. As long as your credit control is good and your customers are reliable payers, this can really help smooth out your cash flow.
- Similar to invoice discounting, invoice factoring consists of selling your invoices to a factoring company who will usually pay you somewhere between 70% to 85% of the value. When the customer pays, the factor pays the remaining amount to the business and charges their fees for the service.
The big difference between invoice discounting and invoice factoring is that your clients will be aware that you are using a factoring service, which may be something you would rather keep hidden. On the other hand, if some of your customers are unreliable payers, it can be a good way to ensure you get paid and that those customers are chased.
There are a small number of loan providers that will set up a business line of credit without the need for a personal guarantee. A line of credit is a little like a business credit card with the lender providing an agreed pot of money that you can dip into and only pay interest on what you borrow. You pay back the amount borrowed on, usually, on a daily or weekly basis.
There are other avenues you can explore for business loans without a personal guarantee:
- If you are a prime government contractor or a subcontractor to a Fortune 500 company, you might qualify for contract financing.
- Peer-to-peer finance has become not uncommon in today’s alternative financing world. Here, your business plan is vital, as is your credit history in persuading someone else you are a good investment.
- Crowdfunding has also grown over recent times but can take a lot of time, is unpredictable and certainly won’t suit all business sectors.
- Equity finance is a viable option for startups, though you are, in a sense, selling a part of your business. This is where private equity and angel investors come in.
- Merchant cash advance is not truly a loan, but the provider gives you cash based on your past sales and takes the money back from future sales. This product used to be primarily for businesses based on credit and debit card sales but has been broadened by automated clearing house withdrawals to include many other sorts of business. Many see that as the last resort because the interest rates can be crippling, so do your research.
Top Business Loans with No Personal Guarantee
Here are two business loans that require no personal guarantee that we can recommend:
Fundbox No Personal Guarantee Business Loan
Fundbox does not require a personal guarantee for business lines of credit up to $50,000. It is great for those who want the cash quickly with funding as fast as the next day. It is also easy to qualify for with a minimum credit score of just 500. You will need an annual revenue of at least $50,000 and three months of invoicing history.
It is not the cheapest option out there, current interest rates run from just over 10% to 79.8%, but you can repay the money early to save on interest. Also, funding from Fundbox is limited to $100,000, which may not be enough for some businesses.
StreetShares No Personal Guarantee Business Loan
If you qualify for the lender’s contract financing, StreetShares may be for you. It allows you to receive up to 90% of verified invoices valued at a maximum of $500,000. The APR is good, between 10% and 12%. Obviously, as stated above, this is limited to prime government contractors or subcontractors to a Fortune 500 company, but if that’s you, this could be a good fit.
SBA Loans With No Personal Guarantee
SBA loans are the gold standard for small business loans with arguably the best interest rates and most favorable terms. Sadly, despite loans being guaranteed by the government, you also need to sign an unlimited personal guarantee for all SBA loans, potentially with one exception – SBA microloans.
SBA microloans are set up to help small entrepreneurs in need, such as women, underserved minorities, and veterans. You still need to show you are in good financial standing for these loans, and there can be some complications around how much money you must keep in your accounts to cover the loan, but you likely won’t need a personal guarantee.
The requirements for these loans differ from lender to lender and state to state, so if you believe this may be a good option for you, do some research into lenders locally to see their requirements.
There are “unsecured business loans no personal guarantee” out there, but they are very far and few between and tend to be more expensive than other forms of finance. At Primerates, we can help find the best loans for you and match you with the most suitable provider. Always do your research and be very careful you understand the loan agreement, how much it will cost and what is at stake should anything go wrong.