Many small business loans require a personal guarantee, especially unsecured business loans without collateral. But not every small business owner is willing to risk their personal finances if their business fails.

And if you operate a business with a partner or partners, signing a personal guarantee can be especially risky because you may not have full control over the decisions the business makes.

Some business loans and lines of credit do not require a personal guarantee. But keep in mind that lenders also want to minimize their risk, and so no PG loans may require tradeoffs, such collateral or high interest rates. 

Here we’ll explain how to find business loans without personal guarantees.

What Is a Personal Guarantee?

A personal guarantee essentially means you agree to be personally responsible for the loan if your business can’t pay the debt. 

If you sign a personal guarantee and if your business defaults, the lender may try to go after personal assets, such as your home, car, or investments for repayment. (How they can collect will depend in part on what you’ve pledged in the loan contract, as well as state laws.) 

Depending on the lender, you may be required to sign an unlimited personal guarantee or a limited one. With an unlimited guarantee, you agree to be liable for paying the entirety of the loan’s principal and interest if your business can’t. This is typically always the type of guarantee you’ll sign if you’re the sole owner of your business.

A limited personal guarantee, on the other hand, is more common with businesses that have multiple owners. Each owner or partner may be assigned a percentage of the debt, and your liability is limited to your share.

If your business operates as a sole proprietorship, there is no legal distinction between you and your business. Whether or not you sign a personal guarantee, you’re likely agreeing to be personally responsible for the debt. 

That’s one reason entrepreneurs are encouraged to form a business entity like an LLC or corporation to help protect your personal assets. As an owner or manager of the business, you may then choose whether to sign a personal guarantee or pledge personal assets. 

Sometimes entrepreneurs confuse the ability to avoid a personal guarantee with the ability to get a loan with bad credit. It’s true that lenders that require personal guarantees often also require good credit. After all, the PG is only valuable to the lender if they can collect from the business owner’s personal assets. 

Still, don’t assume that no PG means there is no personal credit check or vice versa. That may not be the case.

Why Business Lenders Require a Personal Guarantee

Why do lenders want personal guarantees? It’s because making small business loans is risky. Lenders want to try to ensure your business has both the ability and willingness to repay the loan. They will look at factors such as credit history, revenues and time in business.

Sometimes lenders will use collateral to reduce their risk. Your business may be required to pledge business assets like real estate or inventory to secure the loan. 

If your business doesn’t have sufficient business assets, the lender may require the borrower to pledge personal assets, or to even sign a personal guarantee. This gives the lender more confidence the borrower is more likely to pay back the loan. 

New businesses often must agree to personal guarantees. Startup business loans are some of the most challenging loans to get because the business itself doesn’t have revenues or cash to pay back the loan.

Again, even if your business is structured through a business entity to limit your liability, this doesn’t apply to loans where you’ve signed a personal guarantee. 

How Do You Avoid Personal Guarantee on a Business Loan?

Some business loan options (like certain SBA loans or bank loans) may require a PG no matter what. But you may be able to avoid personal guarantees if your business can qualify for financing on its own merits. For many lenders, eligibility requirements include:

The best way to avoid personal guarantees is to build a business that can qualify for financing on its own with a PG required. For most lenders, this means:

Income

Lenders will often require business bank account statements to review annual revenue and/or monthly revenues. The business should have enough income to repay the loan from cash flow. Make sure all business income goes into a business checking account to get full “credit” for business income.

Credit 

Creditworthiness matters to lenders. While some lenders check personal credit, as your business grows, strong business credit scores may help it qualify for financing. (A personal credit check doesn’t always mean the loan requires a personal guarantee, but it may be a tip off that the lender is likely to ask for one.)

Time in business 

Lenders prefer to lend to established businesses. Some will require at least 2—3 years in business to qualify for a small business loan. Again, new businesses will often have trouble avoiding personal guarantees.

Business entity 

Without a legal entity, you and the business are one entity. That’s why a business entity (LLC or corporation, for example) may be required to qualify for a loan without a PG. 

Sole proprietorships are not a separate business entity.

Collateral

Pledging business or personal collateral for a loan may help you avoid a personal guarantee. We’ll talk more about how collateral works in a moment.

Business Loans With No Personal Guarantee

Following are the main types of business funding options, and general guidelines in terms of whether a personal guarantee is likely to be required. Every lender has its own policies, though, so read the fine print during the application process, and before you sign on the dotted line. Don’t be afraid to ask questions if you don’t understand the requirements of the loan.  

Lines of credit

Ideal for working capital needs, a business line of credit gives you a set amount of credit (credit limit) against which you can borrow. Repay funds and borrow again. Credit lines are one of the most popular types of small business financing, and may be available from traditional lenders as well as online lenders.

Personal guarantee requirements vary. 

Term loans

Term loans offer a lump sum amount of money to be paid back over a specific period of time. Repayment terms vary, but short-term loans for 2- 5 years are common, though some can go as long as 20—25 years.

Personal guarantee requirements vary. 

Business credit cards

Business credit cards usually offer an underlying line of credit that can be used for short-term financing. Startups may qualify as long as the applicant has good personal credit scores and sufficient income from all sources (not just the business). Many small business credit cards can also help you build your business credit score. Many small business credit cards can also help establish business credit.

Personal guarantee is almost always required. 

Commercial real estate loans

Commercial real estate loans are used to finance commercial real estate projects such as warehouses, storefronts or restaurants.  Hard money loans may be a good option for investors looking for low-downpayment and easier documentation requirements.

Personal guarantee may be required, but varies. 

Crowdfunding 

Here, business owners raise money from multiple backers or investors, based on the strength of their business idea or product, and their network.

The main types of crowdfunding for small business include rewards-based crowdfunding, loan- based crowdfunding and investment-based crowdfunding.

Personal guarantee is rarely required.

Equipment financing or leasing

Equipment financing or leasing allows businesses to acquire equipment without paying cash upfront. There may be tax benefits as well. Personal guarantee requirements vary. 

Invoice factoring or financing

Invoice factoring or financing is a short-term financing option for businesses that invoice other businesses. With factoring, the invoice is sold for cash now. The factoring company collects the invoice. Invoice financing involves using invoices to underwrite financing.

Personal guarantee is rarely required.

Business cash advance

Merchant cash advances (MCAs) or business cash advances offer an advance against future sales, with past sales used to determine the amount of financing. Weekly or even daily payments may be required.

Personal guarantee is rarely required.

Supplier credit

Suppliers, or vendors, may offer short-term financing to customers, usually on net-15 or net-30 terms. (With net 30 terms payment is due in 30 days.) A personal guarantee is rarely required. Nav Prime gives you up to two actively reporting tradelines reported to the major business credit bureaus.

Nav Prime offers a tradeline that is reported to the major business credit bureaus.

Can I Get a Business Loan Without My Personal Information?

You may be able to get a loan with minimal personal information if your business qualifies on its own. You may also be able to get business financing without a personal guarantee for a secured loan since the collateral helps protect the lender.

Certain types of financing may require a personal guarantee. For example, most small business credit cards require a PG. It’s not until a business is large enough to qualify for a corporate card that a PG is not required. That may mean the business has a significant number of employees and/or revenues to qualify on its own. 

In many cases you’ll need to provide personal information so the lender can avoid potentially fraudulent applications. Know your customer (KYC) laws may also require borrower verification to prevent money laundering and other nefarious activities. 

No Doc Business Loans

Some business loan applications often require extensive documentation. That’s especially true for traditional loans, like those from banks. Traditional business loans may require business bank statements, financial statements, tax returns, or even a business plan. 

Not all business owners are prepared to provide detailed documentation. And that’s why they look for low doc or no doc business loans.

“No doc loans” are loans that require less documentation. 

But there’s a trade off with low doc or no doc loans for business: you’ll often pay higher interest rates or fees. And the truth is all types of no-doc business loans require some level of documentation, even if it’s fairly minimal. They may even check FICO scores.

Lenders still have to verify that the business owner who is applying is who they say they are, that they own the business, and that the business can repay a loan. 

Can I Get an SBA Loan Without a Personal Guarantee?

SBA loans are made by financial institutions and guaranteed by the US Small Business Administration, which develops the guidelines for lenders who make these loans. Most SBA loans require a personal guarantee from each owner with at least 20% ownership in the business. The lender may require a personal guarantee from those with smaller ownership. In addition, a spouse will be required to provide a personal guarantee if he or she owns at least 5% of the business and that ownership combined with their spouse’s ownership totals at least 20% of the business.

The SBA also makes disaster loans directly to borrowers affected by natural disasters. Personal guarantees are not required for smaller SBA disaster loans.

What Is a Loan Guarantor?

A loan guarantor is someone who agrees to pay the loan if the primary borrower defaults. Someone who provides a personal guarantee is a loan guarantor. Similarly, if you get a cosigner for a loan they are a loan guarantor. 

A loan guarantor is responsible for the entire loan balance, interest and fees if the loan is not paid back.

Some lenders may require spouses to sign a business loan personal guarantee; be sure to consult an attorney to clarify how this may affect your personal assets.

What Is the Difference Between a Personal and Business Loan?

A personal loan is made to one or more individuals for household or personal purposes. A business loan is made to an individual or business with funds intended to pay for business needs. 

Lenders will clearly differentiate between the two types of loans in their loan agreements because consumer protection laws are often stronger for consumer loans. 

What Happens if I Default on My Business Loan?

If you default on your business loan, any of the following steps may occur. The exact steps will vary depending on the terms of the contract and/or state law. Be sure to consult a legal professional if you can’t pay your small business loans. 

• The lender will send notices that payments are late
• Late fees and/or interest may accrue
• Late payments may be reported to business credit reports
• The lender will attempt to collect or turn the debt over to debt collectors
• The entire balance may become due and payable immediately
• The lender may seize business assets
• The lender may attempt to collect from personal assets (if a PG was provided)

Read: 14 Options If Your Small Business Can’t Pay Its Bills

What Is the Maximum Amount of a Business Loan Without a Personal Guarantee?

There’s no limit on how much business funding can be obtained on a business loan with no personal guarantee. 

Again, though, more risky loan options or large loan amounts will often require excellent qualifications, and lenders may also want collateral, and/or a personal guarantee. It’s up to each lender to decide how to best protect their business against the likelihood that borrowers will default. Franchise agreements, for example, often require a PG.

Getting access to a business loan with no personal guarantee isn’t easy, especially if you have a new business or smaller business with not a lot of steady revenue. Some loans with the best terms and interest rates, including loans from traditional banks or credit unions, often require personal guarantees until the business is well established. 

As a result, it may be worth considering lenders or types of loans that do require a personal guarantee. If you do, be sure to have a business plan and avoid borrowing more than you can personally repay in case the business doesn’t succeed. 

While that might be daunting, it can provide you with the resources you need to take your business to the next level. Nav can help you find the right business financing resources for your business. Get started now.

Business Loans and Collateral

One way to get away from personal guarantees is to provide sufficient collateral for the loan. Collateral is some type of physical asset the lender can take and sell to help offset any losses on the loan.

How much collateral is typically needed for a business loan?

Business loan collateral requirements vary widely, depending on the type of loan, type of lender, borrower qualifications, the business’s financial health, and even the size of the loan.

When lenders do require collateral for a business loan, they often want the value of that collateral to be worth more than the amount of the loan. Why? Because taking possession of collateral and then disposing of it can be expensive. 

That said, here are some general guidelines: 

Smaller loans

• Lenders may not require collateral with small loans, and may ask for personal guarantees instead. 

Larger loans

• The larger the loan, the more risk the lender takes making the loan. For these loans, lenders may require more substantial assets, such as real estate or equipment. Lenders will often require a valuation to make sure the value of the collateral is realistic and covers the lender. 

Bank and SBA loans

• Most traditional lenders like banks will require collateral for larger loans. If the business does not have collateral, the lender may require the business owner to pledge home equity or other personal property as collateral. 
• Most small SBA loans (less than $25,000) do not require collateral. For larger loans, if collateral is available, the borrower must pledge that collateral but generally SBA loans can’t be rejected solely for lack of collateral. 

Alternative loans

• Many alternative lenders and online loans do not require physical collateral but the lender may place a UCC filing against assets such as accounts receivable.

What Is Considered Collateral for a Business Loan?

Here are some of the most common types of collateral business lenders may accept: 

Equipment

Machinery, vehicles, and other business equipment. While this is often used for equipment financing, sometimes equipment can secure other types of loan. 

Inventory

Products and goods may be used to secure certain loans. However, the value of inventory may drop quickly so it may not be as valuable to lenders as to the business. 

Accounts receivable

Unpaid invoices can be used as collateral. The lender will likely require an accounts receivable aging report. Delinquent invoices are not suitable as collateral. 

Cash savings or deposits

Businesses with savings accounts or other cash accounts may use those funds to secure a loan. Banks often prefer this type of security since it is easy to liquidate. 

Real estate

Personal or commercial real estate may be used to secure a loan. However, declining values of some commercial real estate and the difficulty in foreclosing and selling real estate means it isn’t always a sure bet with lenders. 

Personal assets

Personal property such as a car, boat, savings accounts, or even valuable jewelry or artwork may be acceptable to some lenders though the value would have to be verified, and insurance on that property will be required. 

What Types of Collateral Do Business Lenders Accept?

Keep in mind that just because you think something you own and want to pledge is valuable, it may not hold the same value for lenders. Seizing, storing and disposing of collateral can be expensive and time-consuming. 

Imagine a lender trying to take a large piece of specialized equipment from a factory floor or trying to sell a warehouse full of retail products. It may not be worth it for them. 

For that reason, lenders will carefully assess collateral both to establish its value as well as to understand how difficult it will be to dispose of if the loan is not repaid. In some cases, they may require third-party valuations rather than simply relying on the value established by the business. 

Keep in mind though, that there is another reason lenders like collateral, beyond the specific value of the property. They know that the more valuable the property is to the business (or business owner) the harder they will work to make sure the loan is repaid so that collateral is safe. 

If you do pledge collateral for a loan or financing the lender will likely file a UCC lien against the property. A UCC is a public notice of the lender’s interest in the collateral. UCC filings often appear on business credit reports. 

How Can I Get a No-Collateral Business Loan?

If you don’t have collateral or don’t want to pledge collateral, try to seek out the types of business loans where collateral isn’t usually required. 

The following types of loans don’t usually require collateral, but may require a personal guarantee. See the guidelines for personal guarantees above, and check with the lender or financing company. 

• Business cash advance
• Business credit cards
• Crowdfunding
• Invoice financing
• Loans from friends and family
• Merchant cash advance
• Microloans
• Smaller SBA loans
• Unsecured small business loans
• Vendor or supplier credit

Also keep in mind that sometimes lenders are willing to waive collateral requirements if the business can show a strong ability to repay the loan through excellent credit (high personal and/or business credit scores), strong business revenues and cash flow, and a well-established business with employees and a strong presence in the market. 

Bottom Line: Personal Guarantees

Taking out debt to start or grow a business always carries risk and you always want to take the responsibility of repaying that loan seriously.

Personal guarantees are sometimes necessary to get a business loan or financing, at least until the business can demonstrate strong revenue, business credit, and cash flow.  And sometimes they are simply unavoidable.

If you feel confident in your ability to grow your business, consider loans that require personal guarantees or more extensive financial documents. If that’s not an option, there are options for loans with no personal guarantees, but you may pay more.

FAQs

What is a no collateral business loan?

A no collateral business loan does not require the business to pledge collateral for the loan.

How do I avoid a personal guarantee?

Of course the easiest way to avoid a personal guarantee is to get a loan from a lender that doesn’t require one. But another option is to negotiate with the lender, especially if there is a strong case to be made that the risk to the lender is fairly minimal. 

Depending on the type of loan, and your business qualifications, you may be able to negotiate the removal of a personal guarantee. Or you may be able to limit it to a certain amount of time (for the first XX number of monthly payments, for example). 

Or you may want to look for personal guarantee insurance, especially for larger loans.