Getting small business loans from banks can be like trying to get blood from a turnip, and often it’s not even worth your time. That is why so few people bother even trying. Instead, they take out second mortgages or credit lines on their homes, sell possessions on eBay or at garage sales, max out credit cards, borrow from friends and relatives, and, probably the last step before approaching a bank, scrape up change from the sofa or car.
So why should you even bother getting a business loan? Because sometimes all those methods still come up short when you need cash to start your business or keep it afloat.
After all, there are many reasons why your business might need an infusion of cash, such as:
- Startup Costs
- Experiencing a growth period
- Expanding office facilities, inventory, or equipment
- Buy out one of the owners
- Getting through a seasonal slump
Unsecured business loans are only one way of obtaining financing for your company. They just happen to be the least difficult to receive approval for, though it wasn’t always like that.
In the past, most businesses applied for secured business loans, using their assets as collateral. However, after multiple economic crashes, the banks were left with assets from many businesses that were worth far less than the amounts borrowed. Now, they are no longer willing to assume all the risk: they want the business owners to step up and share it.
Here’s the thing, though. The whole point of forming a business entity is to protect yourself from creditors seeking to recover company debts. If an incorporated business or a limited liability company goes bankrupt, its owners are not liable for the company’s debts after the assets are sold. Except for unsecured business loans that are personally guaranteed.
Do you have to give a personal guarantee for an unsecured business loan?
Well, yes, but, First, let’s look at exactly what a personal guarantee entails. You are requesting a loan and guaranteeing you will repay the entire amount. All of it.
If your business folds, whoever’s signature is on the loan documents will be expected to repay the loan. You will probably be able to reach an arrangement with the bank to make payments, but you are on the hook for the loan until it is paid off.
Now let’s look at some of the alternative scenarios.
- Credit Cards: If you max out your personal credit cards to fund your business and the business folds, you are still required to pay off those cards.
- Second Mortgage or Home Equity Loan: Again, you will have to pay those off or lose your home. While loans with the equity from your home allow you to borrow a large amount you risk losing your home if you can’t make the payments.
- Borrowing from Family & Friends: In some ways, this is even harder than losing your home or declaring personal bankruptcy due to credit card debt. You will have taken money from people who believed in you and only wanted to help you. You can’t cut all of them out of your life just because you can’t pay them back.
- Using A Paid Off Vehicle as Collateral: If you own a car or truck outright, a vehicle equity loan can be just the answer if you need cash but don’t want to deal with a full credit check and lengthy underwriting process of an unsecured loan. This option allows you to use the equity from your vehicle as collateral, but if you miss payments, you risk having your vehicle repossessed.
Based on all that, a personal guarantee to a bank is not actually the worst thing you can agree to. However, whether you borrow from a bank or use other means, you will need to be smart about it.
Should you get an unsecured business loan?
There is no reason why you shouldn’t, if you follow a few guidelines.
- Only borrow what you can afford to lose: Like with gambling, you don’t want to risk your retirement fund, college savings, or your home. Look at the worst-case scenario and be realistic about what it will take to deal with it. Even if you are supremely confident about your business skills, life has a way of throwing curveballs. Hope for the best but prepare for the worst.
- Spread the risk, if necessary: The Small Business Administration requires guarantees from anyone who owns a 20% stake or greater in the company before it approves a loan. But there is no reason for you to place restrictions. Are there other owners, or people who will share in the profits? Then have them share the risk. Each owner or principal should guarantee the same percentage of the loan and the share of profits they would receive.
So, yes, you will probably have to give a personal guarantee to get an unsecured business loan. But there are worse things that you can avoid, as long as you’re smart about it.
