Getting A Business Line of Credit With No Personal Guarantee
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Common advice for entrepreneurs is to keep business and personal finances separate. That becomes difficult to do when every business loan or credit line requires a personal guarantee.
To keep your personal assets out of business affairs, it’s best to go for business loans and lines of credit that don’t have a personal guarantee. However, those are few and far between. In this article, we’ll cover what a personal guarantee is and how to find business financing without it.
What Is A Personal Guarantee?
When looking for a new business credit card or loan you’ve likely seen the term “personal guarantee required” more often than not. A personal guarantee is also called a joint and several liability.
It’s when a lender requires the business owner to be personally responsible for repaying the loan if the business defaults on payments. So you’re like a cosigner on a small business loan for your company. This means your personal credit and business credit are used to qualify.
If the business defaults on the loan payments for any reason, the business owner is personally responsible for repaying the loan. If the lender still can’t collect on the loan amount after that, they’re legally able to seize your personal assets to repay the debt. This includes assets like:
- Real estate property
- Cars
- Investments
- Other high-value assets
There are two types of personal guarantees. Limited and unlimited. An unlimited personal guarantee makes the business owner fully responsible for repaying the loan with the use of their personal assets.
A limited guarantee applies to a company with multiple business owners. This makes each business owner personally responsible for repayment up to a specified percentage.
Many people think the limited liability classification of their business structure protects them from personal guarantees, but it doesn’t. To be clear, that only protects you if someone sues your business. It doesn’t nullify a personal guarantee contract.
This might seem like a hassle for you, but the creditor sees it as protection.
How To Get An Unsecured Business Line of Credit
Getting a business line of credit without the collateral of a personal guarantee can be difficult to do because there are not many options. The ones that exist often have higher interest rates compared to a line of credit that’s secured with a personal guarantee.
To get an unsecured business line of credit your business has to meet other qualifications that minimize the amount of risk to the lender.
- Having an existing deposit or credit relationship with the bank
- Proof of high annual revenues
- Good business credit
If you have an existing relationship with the bank you’re looking to get an unsecured business credit line with then you might have a better chance at approval. This could be a deposit account in good standing with a high balance.
An existing credit line with the lender also improves your odds. For the best chances, the credit line should be open for a few years with excellent payment history. Paired with a clean business credit file, good financials, and a low credit utilization ratio you may be able to have the lender waive the requirement.
The second option requires your business to be extremely profitable. Some business credit card issuers will waive the personal guarantee requirement for businesses that meet a certain amount of time in business along with consistent annual revenues of $1 million and up.
Why And When Do Lenders Require A Personal Guarantee?
While a personal guarantee might seem like a hassle to the average small business owner, the lender has it in place to protect its interests. When lending money, the bank assumes a level of risk because there’s a possibility they won’t get their money back.
With a business credit card, for example, there’s no collateral required that the lender can seize if the business doesn’t meet its payment obligations. That would leave the lender at a loss without a personal guarantee.
Banks usually require a personal guarantee when a company hasn’t been operating for very long or when the future of the business isn’t stable. The guarantee acts as a form of collateral and makes it less risky for the lender to extend credit.
When the repayment of their loan doesn’t hinge on the success of the business entity it’s more likely that they’ll be repaid. Essentially, the guarantee is a failsafe that allows the lender to collect a debt even if the company can’t repay it.
Do I Have to Personally Guarantee a Business Line of Credit?
You don’t necessarily have to personally guarantee a business line of credit. However, most business credit cards include a personal guarantee as part of their user agreements. This makes it difficult to avoid one in these cases.
Some options don’t require that, but the interest rates can be much higher since the lender is taking on more risk.
Types of Business Loans That Don’t Require Collateral:
Merchant Cash Advances
A merchant cash advance works by loaning money based on a percentage of the forecasted sales of your business plus an additional fee. As customers pay for goods or services, the business cash advance is then collected through automatic deduction until it’s repaid.
This type of loan doesn’t require collateral, but the interest rates on a cash advance are extremely high. Some even go into the triple digits. You may want to avoid this and see If you can find another form of business funding to use.
Corporate Credit Cards
Corporate cards are a good alternative to business credit cards with personal guarantees. Typically corporate cards don’t carry personal guarantees since they’re only issued to companies. They’re not designed for sole proprietorships.
Many times, corporate credit cards will have a requirement where a business checking account must be open with a qualifying balance. The monthly payments for the corporate card are set to be deducted from the account. Some of the balance requirements can be rather high.
You’ll still need to have good credit to qualify for a corporate credit card. So if you have bad credit, it may be worth it to improve your credit score ahead of an application.
Overall, a personal guarantee is a form of protection lenders use to mitigate their risk. It can also grant you a lower interest rate compared to getting a loan or credit card without one.
If you’re interested in keeping your personal assets separate from your business you’ll need a relationship with the bank, consistently high revenues, and good business credit.
Otherwise, you’ll need to consider alternative business funding.
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