Just by searching on Google, you can tell it's a common question: can you get a business loan without putting up collateral?

Whether you need extra capital but don't want to put any of your business's assets on the line, or you'd be willing to post collateral but don't have any yet, there are a few different reasons why you might be looking for a loan without collateral. And as it turns out, it is possible to get a business loan without collateral... Sort of.

First, let's take a closer look at which kinds of loans require collateral, and which don't.

Secured vs. Unsecured Business Loans

Secured business loans are loans that your lender secures with collateral. In order to protect themselves from risking financial loss in case your business fails to repay its debts, your lender will attach your loan to tangible assets that they can liquidate and sell if they need.

In other words, if you don't repay the loan, your lender can sell off the equipment, inventory, or real estate that you secured the loan with.

Some business owners are unable or unwilling to put up collateral to take out a loan--often, because they think they're more liable to lose business assets if they default on a secured loan. That's why many search for unsecured business loans, which don't require collateral...

...Except that they do.

While some loans require specific collateral, like a piece of equipment or an unpaid invoice, others will still need you to back your payments up with something. So although "unsecured" business loan is a bit of a misnomer, you still can take out a business loan without tying it to a certain piece of collateral, which is good news for new entrepreneurs.

If you don't have specific assets to collateralize, there are 2 ways to get a business loan: signing a personal guarantee and accepting a lien on your business.

1. Signing a Personal Guarantee

A personal guarantee is a bit self-explanatory: you are personally guaranteeing that your lender will get repaid, whether or not your business can afford it.

Even if your business goes under and has absolutely no money in the bank, you'll still be liable for its debt payments--but you will just have to reach into your personal bank account instead. The lender can only seize what they need to recover what you were unable to repay, but depending on how big of a loan you took out, that might mean losing your car, house, or savings account.

Plus, don't rely on being able to hide behind your business's entity type: even if you've set your business up as an LLC or a corporation, signing a personal guarantee could waive the protections those structures offer.

If you're feeling a bit nervous, though, don't worry. By planning ahead and only taking on the debt that your business can actually handle, you're much less likely to face a bad financial situation, even if your business doesn't last.

Before moving onto business liens, here's a quick breakdown of the different types of personal guarantees to be on the lookout for:

  • Unlimited Personal Guarantees give lenders 100% freedom to seize what they want in order to recover their losses. If you're the sole business owner, you don't have much of a choice--there's nobody else who can chip in, after all. But again, don't worry too much: lenders can only take what they need to repay, so as long as you're smart about the debt you accept, you shouldn't be liable for an excessive amount.
  • Limited Personal Guarantees sets limits on what lenders can seize, generally due to multiple business owners taking out a single loan. We can break them down further into two types:
    1. Several Guarantees usually portion out your liability according to your ownership percentage in the business. The more you own, the more you'll pay out of pocket if the loan doesn't get repaid--and that's it.
    2. Joint and Several Guarantees are riskier, because each guarantor could potentially be liable for the full amount. That's to protect lenders in case one of your partners runs off or doesn't have enough money to repay... But you might get stuck with more than you bargained for.

You can learn more about personal guarantees here.

2. Accepting a Lien

A lien is the "business version" of a personal guarantee, in a sense: it's a legal claim your lender makes on your business's assets, rather than your personal assets, in case of default.

There are a few different types of liens, but small business owners in search of no-collateral loans will probably be most concerned about blanket liens. A blanket lien, like an unlimited personal guarantee, will let the lender seize any and all business assets it needs to repay the loan you took out. You won't have a choice in the matter.

So while a collateralized loan allows the lender to put a lien on a specific piece of collateral, a no-collateral loan will more likely lead to a blanket lien. And that's the general pattern with no-collateral loans: you don't have any control over what lenders will take to recover their potential losses, but you're still liable for those debt repayments.

Generally speaking, it's a good idea to put up collateral for a business loan if you can. While thoughtful borrowing and savvy financial planning can minimize the impact of a failed business and unpaid debt on your personal life, collateral can protect you even further.

Published on: Nov 28, 2016
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