When applying for a loan, even if you have a proven track record, it can be frustrating when the lender asks for a personal guarantee even though it is not a personal loan. You’re not the only one feeling this frustration as it is a topic that comes up regularly in financial forums and communities. People want to know when their business can take a small business loan without the owner or co-founders having to put down personal guarantees.
The good news is that, when you present the information the right way and have a track record, your business can begin borrowing money without needing a personal guarantee. The goal is to reduce your risk to the lender, which means proving you have an established record of success and a history of business stability.
As a small business loan marketplace, we work with multiple small business lenders and, based on our experience, here are some of the ways you can help speed up the process.
- Legal documents and entity status
- Monthly financial statements
- Multiple loans from the same lender
- Strong business credit scores
- Owned business assets for collateral
- A track record showing business success
Legal Documents
The first step in not having to give a personal guarantee on a small business loan is to simplify the research the lender must do. This can be done by having your legal documents in order, including having an LLC and an EIN. LLCs are not necessarily required, as sole proprietors can get funding, but they do help.
LLCs
Your LLC, combined with a business bank or checking account, will keep your personal assets separated from your business assets. When you combine personal assets with business assets, it is harder to determine what the business owns, as well as which personal assets inflate your company’s financial well-being.
When it’s hard to split the two and your personal assets are visible, the lender may decide you need to put a personal guarantee down, because you have presented both and they cannot determine which is which or how financially sound your business is.
Pro-tip: Having an LLC lets the lender verify how long your company has been in business and validates your company’s identity, as they can check it against public records. Making their job easier can help you with getting approved.
EINs
This is your employer identification number and is assigned to your business so that you can pay taxes. Lenders will use it to check your business credit score as well as verify how long your company has existed. Your EIN is also normally used when you apply for a business bank account.
When combined with the LLC, you can display the assets in the business bank account to show you have the cash flow for a larger deposit and verify that you have a solid financial history, lowering your risk as a borrower. When your risk level is decreased and you’ve proven you can likely make payments, you may be able to bypass the personal guarantee.
Pro-tip: If you have a business bank account with the lender, they can more easily verify your financial history and your ability to make payments as everything is in one place.
Monthly Financial Statements
One of the easiest ways to not be required to put a personal guarantee on a business loan is to prove you have the cash flow available over an extended period of time, as this reduces the risk to the lender. You can do this in a few ways:
- Provide 24 months of monthly business bank account statements.
- Bring the last few years’ worth of tax returns to show income and expenses.
- You can go a step further with a business plan that shows how you’re adjusting to reduce expenses, increase profits, and free up cash flow.
- Balance sheets make great supplemental documents to bank accounts if you don’t have multiple years’ worth of information to submit.
- Client contracts that are at least 1-year to 2-year financial commitments to your business help show you’ll have revenue coming in, especially if the contracts are dependent on the loan.
The last bullet could be a situation where you are applying for equipment financing to increase production and meet the contract minimums of the client. Once financing is secured, they’ll sign the commitment, and you can increase production and revenue.
Your supplemental documents, like a business plan and how revenue will increase so you can pay back the equipment loan, will come into play. Having them handy could reduce your risk as a borrower, potentially allowing you to avoid having to make a personal guarantee.
Be a Loyal Borrower
Company’s love loyalty, and when you pay back loans on time and stick with the same lender, you build trust, rapport, and a history of financial responsibility. Once your history is in place, you may fast-track your business to being able to borrow money without a personal guarantee because you proved your risk level as a business owner is minimal with repeat borrowing.
Strong Business Credit Scores
Just like personal credit scores, there are three bureaus for business credit scores, including Dun & Bradstreet, Equifax, and Experian, and each may track different debts. Having a strong business credit score with the bureau your lender relies on can show financial responsibility and reduce your risk as a borrower.
Start by asking the lender which bureau or bureaus they use to verify your business credit score. Now request a copy of your business credit report from that organization. If there are any debts you can pay down quickly or pay off, be sure to do so. The fewer debts on your report, the higher your score could be.
If your score is high enough, and you leverage other risk-reducing tips from this guide, you may not be asked for a personal guarantee on your small business loan.
Business Assets for Collateral
If the lender can pursue assets when you don’t make payments, these assets can help them recover their losses. As such, by leveraging business collateral, you may not need a personal guarantee. You must own the asset outright, as the lender needs to be able to claim it though. If you have a business loan and assets are already being used as collateral, chances are the new lender won’t accept them.
You can see which assets are already claimed by viewing UCC liens on the Secretary of State’s website in the state where your business is registered. If the UCC lien lists specific identifiers like VIN numbers and you have machinery, equipment, or real estate not listed, you can use those for the new loan as collateral and create a new UCC lien. If the assets are enough to lower your risk, your business may be able to take the loan without your guarantee.
A Track Record of Success
Having a previous track record of success in a similar industry/business may offset the newness of your current business, if that’s the issue here. This is more likely to help if your company has been around for at least 6 months to a year, but it isn’t guaranteed.
Bring past financial information to show how you grew and maintained a business before and how those learnings apply to your new venture. This can help show that the trajectories of your old business and new business are similar, and that you are not likely to default on the business loan. By being less likely to default, you may reduce the chances of being asked for personal guarantees.
Time and stability are the only surefire ways for your company to be able to get a small business loan without you having to risk personal assets. However, providing information like the above, (i.e., financial statements, business checking account information, and proof of multiple loans with the same lender) can help.
