Recently, my reader, Sylvia Davison from Omaha, Nebraska asked me this question about Kabbage loans:
Does Kabbage require a personal guarantee for my business loans?
Yes, as compared to many other lenders who also require collateral to secure your loan, Kabbage does not because their loans are unsecured which allows startups and growing small businesses to qualify. Kabbage does require that you sign a personal guarantee.
This is one of the reasons that I recommend these loans and business lines of credit for your small business working capital needs. Read my review of Kabbage business line of credit loans here.
Another good option for your small business financing is invoice factoring by Fundbox. Read my review
Further Explanation about Personal Guarantees on Business Loans:
What is a Personal Guarantee on a Business Loan?
A personal guarantee is your promise, as executed by signing a legally binding document, to agree to be personally liable for the debts of your business. If you take an unsecured business loan this personal guarantee is not tied to a specific asset, such as is done with secured business loans.
Be aware this means that your creditors can pursue both your business and personal assets if you fail to repay the loan. Read more FAQ about what happens when you default on a loan.
This is different than a secured business loan, which uses collateral as security for the loan repayment. Learn more about secured loans and collateral by continuing to read this article.
Should I Sign a Personal Guarantee on a Business Loan?
- Yes, if you have carefully reviewed your balance sheets, profit and loss and sales to expenses projections and feel confident that your business can repay the loan.
- No, if you are not part of the management team that can ensure business operations will continue to function profitably with the ability to repay the loan.
Remember in some cases; lenders will require your spouse to also sign a personal guarantee. So discuss this in advance of applying for your business loan. Another reason I recommend Kabbage, family harmony 🙂 because they do not require you or your spouse to sign a personal guarantee.
Also, when you sell your business be sure to get all personal guarantees released, otherwise you will be held responsible and liable if the new owners do not repay their business loans.
Small Business Loans without Collateral – Unsecured
One of the main reasons I recommend Kabbage so highly is that the majority of small business owners across America have a great need for working capital but are unable to secure loans by pledging assets because since are new companies and have not grown yet to a level of financial strength with readily available assets to pledge.
Most SBA small business administration loans require borrowers to put up personal collateral, sometimes even their primary home! I don’t recommend this for most small business working capital needs.
Your business should be able to generate enough profit to repay your working capital loans and still have enough for expenses salary and investment in continuing marketing and promotional activities to build your business.
When Personal Guarantees are Required
Most small business loans, including SBA loans, require all business owners with higher than a 20% ownership share to personally guarantee the repayment of the business loan. You will be required to sign a promise to pay back the loan, in full if your business defaults on its payment schedule and neglects to repay the loan.
Why Personal Guarantees are Utilized
Banks and other lenders take a more significant risk when they lend money to small businesses than individuals, that the loan will not be repaid because a business fails and defaults on its loan. Business loan defaults are more than double, at 5% for SBA loans than the average personal loan default rate of 2.3%. As such, lenders need to reduce their risk to avoid losing money.
Your business creditors will pursue you if your company fails to repay their loans. This is different than collateral backed or secured loans. Continue reading to learn the important differences.
Differences Between Personal Guarantee and Collateral
A personal guarantee is not the same as collateral or security for a loan to “secure it.” It is a signed document where you agree to pay back your business loans if your business defaults.
An example of collateral would be the assets, either business or personal property, that you pledge to secure or guarantee the lender of their financial compensation of your loan. Collateral is assets with a resale value such as real estate, stocks, jewelry, inventory, equipment and other valuables which are pledged as a backup source of financial re-compensation for the lender.
Some lenders require both collaterals to secure the loan and a personal guarantee. However, my recommendation for your short-term business financing needs, Kabbage, does not require any collateral and is thus an unsecured business loan.
Types of Collateral for Secured Business Loans
Many small business financing options require collateral such as real estate, stocks, bonds, and other valuable assets to secure the loan. This means that you pledge those valuables to be held, not physically but legally, by the lender until the loan is fully repaid at which time your collateral is released from its obligation. Thus collateral is specific assets that you pledge as security for a loan if your business defaults.
Traditionally physical assets such as real estate and equipment have been used to secure small business loans, now with the advent of online lenders such as Kabbage and Fundbox nonphysical assets such as your accounts receivable, unpaid customer invoices, can be used as collateral assets.
This is how invoice financing works, you pledge the value of your unpaid customer invoices and receive funds based on your customer’s ability and history of repayment. Because your ability to get approved for this type of funding relies on your customer’s, usually higher, credit scores, it is ideal for new startups that have yet to establish their strong credit scores.
If you want to consider invoice financing or factoring read my review of Fundbox, my recommendation for using your unpaid invoices and account receivables to finance your small business startup.
Liens on Business Assets
A lien is a bank’s method of legally being able to take your business access if you do not repay your loan. Many businesses have multiple loans and multiple UCC liens. Know that the first lien has the top priority in seizing your business assets.
The lien is a legal claim against your business assets and property which includes real estate, equipment, inventory, supplies, cash, and tools.
Each state has slightly different lien laws. However, most allow creditors to file a lien if a business fails to pay their debts as agreed upon in the signed loan agreement. This lien gives creditors a security interest in that business property until the lien is released by full loan repayment.