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.

Fortunately, there are some business loans and lines of credit that you can get without a personal guarantee. 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 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. 

Why Business Lenders Require a Personal Guarantee

Small business loans are 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 confidence the borrower is more likely 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?

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 look at 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. 

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. 

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. 

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 line of credit gives you a set amount of credit (credit limit) against which you can borrow. Repay funds and borrow again.

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.

Personal guarantee is typically required. 

Commercial Real Estate Loans

Commercial real estate loans are used to finance commercial real estate projects such as warehouses, storefronts or restaurants. 

Personal guarantee may be required, but varies. 

Crowdfunding 

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.

Merchant Cash Advance

Merchant cash advances 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.)

Personal guarantee is rarely required.

Can I Get a Business Loan Without My Personal Information?

You may be able to get a loan without 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. 

Can I Get an SBA Loan Without a Personal Guarantee?

SBA loans are 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. 

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 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)

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. 

Getting access to a business loan with no personal guarantee isn’t easy, especially if you have a new or smaller business. Some loans with the best terms, 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.