How to Get a Business Loan with No Personal Guarantee

If you are seeking financing for your business, there are a lot of options to consider, but finding funding that your business qualifies for can be a different challenge. It’s important to understand the different types of loans available to you and to recognize when a personal guarantee may be required. Unsecured business loans (loans with no collateral needed) are available if you look for them.

What Is a Personal Guarantee for a Business Loan?

A personal guarantee grants a bank the right to go after your personal assets in the case that your business is unable to repay a business loan. Essentially, the lender will be able to obtain the right to your home, vehicle, or other high-value assets if the loan is not repaid.

Banks often require personal guarantees for business loans when the company does not have a long history of operations or when the future of the business is uncertain. Obtaining a personal guarantee for a business loan essentially grants the bank collateral, which can make a business loan less risky for the lender.

Related Reading: Types of Loans for Your Small Business

Types of Personal Guarantees

Personal guarantees may be unlimited or limited, and it's important to understand the difference between these two options. A limited personal guarantee is just that - it's a guarantee that only applies to a specific amount or set of circumstances. For example, if you're applying for a business loan and the lender requires a personal guarantee, you may be able to negotiate a limit on the amount you're responsible for should the business default on the loan.

On the other hand, an unlimited personal guarantee has no limitations. This means that you're essentially on the hook for the full amount owed, regardless of the circumstances. And remember, the lender will be able to obtain the right to your home, vehicle, or other high-value assets if the loan is not repaid.

It's important to carefully consider the risks involved with each option before making a decision. If you're not sure which type of personal guarantee is right for you, it's always best to consult with a legal professional or financial advisor.

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Can I Get a Business Loan with No Personal Guarantee?

It is possible to get a business loan with no personal guarantee, but the terms required to obtain one are much more strict, and the interest rate can be high. To obtain a business loan without a personal guarantee, it is recommended to set your business up as either a corporation or LLC and then work on building business credit quickly. 

If your business is set up as a sole proprietorship or partnership, you will likely need to give a personal guarantee or another form of collateral to obtain the most competitive lending terms. It helps to have a strong personal credit history when trying to get a business loan without using collateral.

What Are Unsecured Business Loans?

Unsecured business loans don’t require any collateral in order to secure the loan. Thus, there will be no pledge of real estate, vehicles, or other high-value assets when financing is obtained. If the business defaults on the loan, the lender must initiate a lawsuit in order to collect on the balance of the loan.

How Do Unsecured Business Loans Work?

Unsecured business loans work like any other type of financing and provide your business with funds to help with working capital needs or to help with emergencies. 

Types of unsecured business loans can include term loans, lines of credit, invoice factoring, and merchant cash advances. They are often faster to get than other traditional financing but may entail high interest rates and strong business financials.

Secured vs. Unsecured Loans

What is the difference between secured and unsecured loans?

Secured Loans

Secured loans require collateral, such as property or inventory, which serves as security for the lender. This can often result in a lower interest rate and more favorable repayment terms. It’s important to thoroughly understand the terms and conditions of a secured business loan before agreeing to it, as failure to make payments could result in the loss of the collateral. 

A secured loan is generally best when acquiring an asset for a business, such as an office property or equipment to use in the business. The loan will have a lower interest rate than an unsecured loan and may not require a personal guarantee.

Unsecured Loans

Unsecured loans do not require any collateral in order to be approved. This means that you won't need to offer any assets as security, such as real estate or vehicles. Instead, lenders will typically assess your creditworthiness and financial history to determine if you're a good candidate for the loan. While unsecured loans may come with higher interest rates, they can be a good option if you don't have any collateral to offer or if you want to avoid the risk of losing valuable assets.

These types of business loans are best for everyday working capital needs, to initially start a business, or to have in case of emergency. Unsecured loans will generally have a higher rate of interest and may require a personal guarantee.

Types of Loans that Don’t Require Collateral

There are some forms of financing that don’t require collateral. These include:

Unsecured Business Lines of Credit

With a business line of credit, a lender approves you and your business for a specified amount that can be used whenever needed. It is similar to a credit card in that you use only what you need, and interest is charged on only the amount borrowed. Unsecured business lines of credit are best for working capital needs or for emergency funding.

Merchant Cash Advances

A merchant cash advance provides a specific amount of money as a percentage of forecasted sales. The advance is repaid as customers submit their payments for goods or services on a daily, weekly, or monthly basis. 

Merchant cash advances have extremely high interest rates. It is important to have a clear understanding of the repayment agreement before agreeing to a merchant cash advance.

light bulb green icon Fundid Recommendation: Our partners at Uplyft Capital offer a marketplace where you could be eligible for merchant cash advances and alternative financing solutions from one of their vetted partners through your application. 

Uplyft Capital is a good fit for business owners with bad credit who are seeking to secure funding with a short turnaround. The application process requires minimal documentation and there are no fees. They have a tiered system where there are four different programs to choose from. Depending on your business needs, a Funding Advisor will place you in the program best suited to your financial requirements. Explore your options today!

Term Loans

A business term loan is a type of loan that provides a fixed amount of money to a business that is repaid over a predetermined period of time with interest. Some lenders offer business term loans without a personal guarantee if applicants have strong personal credit and business financials. The repayment term of the loan is typically between one and ten years, and the interest rate is usually fixed, which means it stays the same throughout the duration of the loan.

As a business owner, it's important to understand that your repayment amount and schedule are set in stone when you take out a term loan, so make sure you have a clear understanding of your business's financial needs and capacity before taking out this type of loan.

Equipment Financing

Equipment financing is used to purchase specific equipment for your business. Usually, the equipment is used as collateral for the loan. If the company defaults on repayment, the lender will have the right to seize the equipment to settle the balance of the loan. 

This type of financing is great when purchasing a piece of equipment that can be used to support the operations of a business. Interest rates for equipment financing are lower than they would be for an unsecured line of credit.

Invoice Financing

There are several different methods of invoice financing, but they all require pledging customer invoices in exchange for funding. The amount received through invoice financing will vary but generally ranges from 50% to 80% of the value of the invoices pledged, depending on the risk profile of the customer. 

The lender charges the business a fee for invoice financing, which can be very expensive, especially if customers do not pay on time. This type of financing can be obtained without a personal guarantee through certain lenders.

How to Get a Business Loan with No Personal Guarantee

Many lenders require a personal guarantee as a way to ensure that the borrower will be able to pay back the loan. However, there are some loan types available for those who want to avoid a personal guarantee. As you start your search for business loans with no personal guarantee follow these steps: 

  1. Research lenders who provide business loans with out a personal guarantee.
  2. Next, prepare a solid business plan outlining your vision, strategies, projected revenues and gather any other documents the lender you are considering may need.
  3. You’ll also need to demonstrate your creditworthiness and financial stability through various documents such as bank statements and tax returns.
  4. Finally, be prepared to negotiate with lenders to secure favorable loan terms.

It is important to evaluate each lender and their requirements before submitting your loan applications. It is best if you are able to get a pre-approval without having to have a hard pull on your credit to determine your eligibly for funding so your personal credit score is not negatively impacted.

Explore Your Business Funding Options

While obtaining a business loan with no personal guarantee is possible, it can be costly for your business and difficult to find a lender who can serve your business needs. There are other funding options such as working capital loans and loan crowdfunding that you can consider as you seek business funding. At Fundid, we are here to help you understand your funding options and support your business's growth. Visit the Fundid Capital Marketplace to get connected to lenders looking to serve small businesses. 

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Editor's Note: This blog was originally published February 24, 2022, and has been updated for accuracy and comprehensiveness.