Published By Faith Stewart at September 2nd, 2021
Does business funding with no personal guarantee credit exist? The simple answer is yes. How do you get it, and do you even need it? Those are harder questions to answer.
To some, it may seem like a mythical idea, a unicorn if you will. Even if you have strong business credit, many lenders will ask for a personal guarantee on a business loan. So, what are companies talking about when they say you can fund a business with no personal guarantee credit? Let’s find out.
Before we can talk about no personal guarantee credit for business funding,we need to define a few terms.
First, we’ll define business credit. Business credit is credit, like a credit card or other type of credit account, in the name of your business rather than in your name personally. When you apply, you use your business name, your business contact information, and your EIN instead of your social security number.
Then, the business is responsible for repayment. Sometimes, the account does not report to your personal credit report. Meaning, your personal credit scores will not be affected by your business credit accounts.
Now, let’s talk about your business credit report. This is a report, like your personal credit report. Lenders use it to evaluate the creditworthiness of the business. It consists of the credit history of the business, the business credit score, and other data. The business credit score is made up of the payment history of those business credit accounts that actually report to the business credit reporting agencies.
Not all business accounts will do that. But those that do, are the ones that make up the score on the business credit report.
To understand what no personal guarantee credit is, you have to know what a personal guarantee is. If you get a credit account with a personal guarantee, you are responsible for repayment. By definition, all personal credit accounts have a personal guarantee.
This could mean a hard pull on your personal credit, which can lower your personal credit score. However, in theory, if your business has an account in its own name and it is set up to be a separate entity from you, the owner, it is responsible for its own debt.
Still, many companies require a personal guarantee from the business owner before extending business credit, especially small businesses. This is due to many factors, including data from the Bureau of Labor statistics that states 20% of new businesses fail within the first year, 45% within the first 5 years, and 65% in the first 10 years. In fact, only 25% of new businesses make it 15 years or more.
It’s easy to see why lenders and credit card companies would ask for a personal guarantee from business owners when it comes to business credit.
The short answer to this is yes, but it is not that simple. First, most business accounts that do not require a personal guarantee are designed for larger businesses or older businesses.
There is very little out there when it comes to no personal guarantee credit for small, newer businesses. There are some vendors that will extend net terms without a personal guarantee if your business meets certain requirements.
Requirements may include a certain minimum time in business, a minimum average balance in a business bank account, specific annual revenue, and more. Other than that, there are a couple of business charge cards you can get without a personal guarantee. For example, Brex and Divvy both offer this type of product.
The catch is, these are charge cards, not credit cards. So you have to pay the balance off each month. Basically, it’s like a card that you can use anywhere and you have net 3o terms on the balance. It’s similar to a vendor account, but more flexible.
There are also business credit cards available without a personal guarantee, but only if your business credit is strong enough. In general, your business needs to be earning millions in annual revenue to qualify for these cards.
Why try to avoid a personal guarantee? No one likes risk. That’s why businesses require a personal guarantee and why business owners don’t love to give one. However, if you have true business credit that requires a personal guarantee, the business will have to pay first. You will be personally liable for anything that the business cannot cover. Still, you will not be first in line for all of it.
A better option is to realize that if your business is small and young, you are likely going to need a personal guarantee for much of the funding. Yet, you can work to reduce your liability in a number of ways. The first way to do that is to incorporate your business as a corporation, S-corp, or LLC. Your business attorney or accounting professional can help you with that.
Next, you can look at funding options that do not require credit at all. Does this debt-free funding even exist? Sure it does.
Then, you can work on building a strong business credit profile for your business, including a strong business credit score. This will help you be able to get funding for your business without as much reliance on a personal guarantee. Basically, the stronger the business credit, the less the lender feels the need to rely on the owner’s creditworthiness.
The key to this is to look for creditors who will report positive payment history to your business credit profile. Even some lenders that require a personal guarantee may report payments to your business credit report and not your personal credit report.
Stop worrying about the personal guarantee and worry more about building business credit so you can reduce the amount of personal guarantee required to get the funding you need.
If you cannot get all of the funding you need for your business with non-debt options, and your business is young and small, you may very well have to use a personal guarantee to get the funding you need in the beginning. That is okay.
The key is to know exactly what you are getting. Definitely make sure you apply with your business name, EIN, and contact information. Then find out what credit agencies they report to. If they report to the business credit agencies like Dun & Bradstreet, Experian Business, or Equifax (Business), that is a good thing. It will help you reach your goal of building business credit faster.
If they report to personal credit, so be it. Just keep working through the process of building your business credit profile as quickly as possible. Then, you can tip the scales away from your personal liability as much and as quickly as possible.
If you really want to stay away from a personal guarantee, you can try one of these debt-free funding options. Just remember, debt-free doesn’t mean cost-free. There are always some costs associated with funding.
This is a 401(k) Rollover for Working Capital program. It’s also known as a Rollover for Business Startups (ROBS). Per the IRS, a ROBS qualified plan is a separate entity with its own set of requirements. The plan owns the business through its company stock investments, rather than the individual.
This type of financing isn’t a loan against your 401(k), so there’s no interest to pay. It does not use the 401(k) or stocks as collateral. Instead, this is simply a movement or change of custodian. The plan has to be a plan from an employer you no longer work for, and you can no longer be contributing.
Crowdfunding is a way of getting multiple smaller donations from a lot of individuals. Hence the term “crowd” in crowdfunding. There are many options for crowdfunding platforms, but be sure you know what you are getting into. Many crowdfunding platforms make you give all of the funding back if you do not make your goal by the end of the campaign.
They will take a percentage of the donations. That’s how they make their money. In addition, they may push to have you deliver on your promises. Crowdfunding tends to work best when donors can personally connect with a product or service . Straightforward businesses may not do so well.
The kinds of businesses which do the best often associate with products not quite on the shelves yet or artistic endeavors.
While there are “professional” angel investors out there, an angel investor can be pretty much anyone. It could be a friend or family member sitting on home equity, or local professionals who are looking to invest. Consider people you know well and people you may not know so well.
There are some grant options available, and of course those do not have to be repaid. However, they are highly competitive, and it is unlikely it will be enough to fully fund your business. Also, grants will require time on your part to prepare all necessary paperwork. Some even require an application fee.
No personal guarantee credit for business funding is great to have. Still, chances are you are going to need a personal guarantee to get funding at some point. There are a lot of good options out there. In fact, SBA loans are a great option. You can also look into alternative lenders like Fundbox and OnDeck or Accion.
Using a personal guarantee to get the ball rolling while you work on building your business credit profile is a valid option. It is what most business owners have to do. But, you need to build a strong business credit score so lenders can start to rely more on the credit worthiness of your business than you personally. Credit Suite has a whole program designed to help do just that. Find out more about the Business Credit Builder now.
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