If you’re on the hunt for business loans, “no PG” may seem too good to be true–especially if your business lacks strong credit. But believe it or not, there are loans that don’t require you to provide a personal guarantee. This can be great news for entrepreneurs who prefer to keep their personal assets entirely separate from their business activities. Here’s a guide to help you understand “no PG” business loans and the process of getting one.
Can You Get Business Loans with No PG?
Yes, it’s possible to get a business loan without a personal guarantee. However, borrowers should understand that it can be challenging to obtain business financing without a PG. To get this type of loan, you will need to proactively strengthen your application and build relationships with the right lenders. “No PG” business loans exist, but you need to have a good strategy to get them.
Why Lenders Usually Require a Personal Guarantee
When you get a business loan, the lender usually asks you to sign a personal guarantee. When you sign a personal guarantee, you’re committing to personally repay the loan in the event that your business cannot pay off the debt. This means that the lender can legally pursue your personal assets if your business fails to repay the loan.
Personal guarantees exist to help lenders protect themselves from borrowers who default on their loans. Lenders feel more comfortable approving business loans for borrowers who will be required to personally repay the debt if their business cannot.
Tips for Getting a Business Loan with No PG
Since lenders use personal guarantees to protect themselves against losses, borrowers who want to avoid signing a personal guarantee will need to use other methods to offset risks for lenders. Here are some strategies that borrowers can consider implementing to avoid having to sign a personal guarantee.
Have a Separate Business Structure
If you’re operating as a sole proprietorship, it’s very difficult to separate your personal finances from your business finances. Therefore, the first step to avoid signing a personal guarantee is to establish your business as a corporation or LLC (Limited Liability Company) and open a business bank account to keep your business finances separate from your personal finances.
By operating your business as a separate legal entity with its own bank account, you’ll be better equipped to show lenders that your business’s revenue and assets are sufficient to repay the loan.
Build Up Positive Payment History
To help lenders view your business as less of a risk, you should establish business credit. To do this, your business will need to have a history of paying its bills on time.
The most recognized business credit service is Dun & Bradstreet. When lenders and suppliers are determining your business’s credit worthiness, they will likely consult your D&B rating.
D&B business credit reports contain information on your business’s history of payments to creditors. If your business has a demonstrated history of making full, on-time payments to creditors, your business is more likely to have a high “paydex” score from D&B.
Offer Collateral
To avoid signing a personal guarantee, some business owners offer high-value business assets as collateral. High-value business assets may include real estate, equipment, or other high-value items owned by the business. This strategy can be especially effective if the collateral is worth more than your personal assets.
Build Relationships With The Right Suppliers
Some business suppliers do not require business credit history or a personal guarantee to open credit accounts with them, especially if you will prepay for your first orders or open an account with a small limit. By working with these suppliers, you can establish some business credit to strengthen your future applications for business financing.
Speak With a Variety of Lenders
Diversify your search and speak with a variety of lenders, including banks and other types of institutions. Though many lenders will require a personal guarantee–especially if your business has not yet established strong credit–there are some lenders who will be open to waiving the PG requirement if you demonstrate that your business will repay the loan.
Types of Loans You Can Get Without a Personal Guarantee
Though many business loans will require a personal guarantee, some types of loans may not have this requirement if you’re working with the right lender and if your business is able to use other methods to offset any potential risks for the lender. Here are a few types of loans that might not require a personal guarantee depending on your business’s circumstances.
Lines of credit
A line of credit is similar to a credit card. It enables you to withdraw up to a certain amount of money to operate your business, and you’re only charged interest on the amount that you borrow. As long as your limit is high enough, you can keep borrowing and repaying.
Term Loans
With a term loan, you receive a sum of money and you are required to pay that amount back with interest over a period of time. Business owners often use term loans to pay for major purchases, such as equipment.
Business Credit Cards
Most business credit cards require a personal guarantee, however some lenders may provide “no PG” credit cards in certain situations. Responsible use of a business credit card can be a great way to build business credit and strengthen future applications for business loans.
Commercial Real Estate Loans
If you’re looking to purchase commercial real estate, you might be able to find lenders who can offer commercial real estate loans without a personal guarantee. To minimize the risk for your lender, it will be important to demonstrate the ability of your business to repay the loan.
Crowdfunding
Crowdfunding is when multiple investors purchase equity in your business or lend you money. Since you’re collecting funds from multiple investors, the amount contributed by each individual generally does not need to be substantial. Business owners usually use the strength of their business idea or plan to convince people to contribute via crowdfunding.
Since crowdfunding is usually based on the strength of the business idea or plan itself, investors rarely require a personal guarantee.
Frequently Asked Questions (FAQs)
Here are answers to some frequently asked questions about obtaining a business loan without a personal guarantee.
Do SBA Loans Require a Personal Guarantee?
Loans that are backed by the Small Business Administration (SBA) typically require a personal guarantee. When a personal guarantee is required, the SBA will generally require business owners who own at least 20 percent of the borrowing entity to sign an unconditional guarantee. An unconditional guarantee requires the owner to pay back the full amount owed if the business defaults on the loan.
Individuals who own less than 20 percent of the borrowing entity may sign a limited guarantee. This type of guarantee has a limit to how much the individual will need to repay in the event of loan default.
How Do I Protect Myself From a Personal Guarantee?
The best way to protect your personal assets from being seized is to borrow responsibly. Before taking out a business loan, you should craft a business plan and carefully examine your business’s ability to repay the loan.
What Happens If You Can’t Pay a Personal Guarantee?
If you can’t pay a personal guarantee, the lender may begin legal proceedings against you and seize your personal assets. This can impact both your personal and business credit.
If you took out an SBA loan, you may be able to take advantage of the Offer in Compromise (OIC) program. This program enables borrowers in certain situations to settle their debt for less.
How Do I Remove a Personal Guarantee From a Loan?
Under certain circumstances, your lender may be willing to remove or reduce your personal guarantee. For example, if your business expands its customer base and increases its profits, your lender may be open to renegotiating.
Another situation in which the lender may be open to removing or reducing your personal guarantee is if you have made consistent payments over the course of a certain period of time.
Each lender has its own policies and levels of risk tolerance. While some may be open to reducing or removing your personal guarantee, others may require you to use a new method to secure the loan (for example, through collateral).
We Can Help You Find Business Loans–No PG Required
When searching for business loans, “No PG” may seem impossible. But it isn’t. With the right strategy, many business owners can finance their operations without a personal guarantee. To get connected quickly with the right lending partners–including lenders who may not require a personal guarantee–just answer some questions on BusinessLoans.com. Our proprietary technology makes it easy for you to quickly find the best lenders for your needs.
