Unsecured Startup Loans: Do they really exist?
December 6, 2010 8:35 AM Subscribe
Unsecured Startup Loans: Do they really exist?
I'm currently researching what it's going to take for my partner and I to start a medical practice. We have no collateral, but solid field backgrounds and great personal credit. In researching, I've come across programs like Loyalty Business Loans and America One Unsecured. I have a hard time believing programs like this aren't too good to be true. Are these legitimate and feasible solutions for a startup? Is there anything to watch out for (i.e. the requirement of personal guarantees)? Do we have other options?
We're going to need about $250K, and we're not going to open for a while, I'm just getting prepared.
I'm currently researching what it's going to take for my partner and I to start a medical practice. We have no collateral, but solid field backgrounds and great personal credit. In researching, I've come across programs like Loyalty Business Loans and America One Unsecured. I have a hard time believing programs like this aren't too good to be true. Are these legitimate and feasible solutions for a startup? Is there anything to watch out for (i.e. the requirement of personal guarantees)? Do we have other options?
We're going to need about $250K, and we're not going to open for a while, I'm just getting prepared.
Yes, you would definitely want to watch out for personal guarantees in particular. Those are extremely common in business loan arrangements; so is "a security interest in all the assets of the business" (I know you said unsecured, but again, that's a very common term in these loans so watch out for it).
Generally speaking, business startup loans are very high risk and so the banks give themselves as many avenues for recovery as possible in case the business does in fact fail. This is why many startups are funded by credit card advances, "loans" (often de facto grants) from family members, and angel investment - though the latter, of course, often requires you to put up an equity stake to get the capital. If that's an acceptable trade off, maybe research angel investors in your geographical area and/or industry.
posted by rkent at 8:41 AM on December 6, 2010
Generally speaking, business startup loans are very high risk and so the banks give themselves as many avenues for recovery as possible in case the business does in fact fail. This is why many startups are funded by credit card advances, "loans" (often de facto grants) from family members, and angel investment - though the latter, of course, often requires you to put up an equity stake to get the capital. If that's an acceptable trade off, maybe research angel investors in your geographical area and/or industry.
posted by rkent at 8:41 AM on December 6, 2010
You don't want to pledge your personal assets as collateral for a startup, or for any corporation, really. That's the whole point of being a corporation or an LLP--your personal assets are protected
This is not the only reason. Even if you make a personal guarantee, the limited liability corporate form has some benefits. For instance, personal assets are generally still protected from legal judgments against the corporation. And anyway, personal guarantees issue on a loan-by-loan basis, so you still conceptually maintain your liability limitation with respect to other investments.
posted by rkent at 8:44 AM on December 6, 2010 [1 favorite]
This is not the only reason. Even if you make a personal guarantee, the limited liability corporate form has some benefits. For instance, personal assets are generally still protected from legal judgments against the corporation. And anyway, personal guarantees issue on a loan-by-loan basis, so you still conceptually maintain your liability limitation with respect to other investments.
posted by rkent at 8:44 AM on December 6, 2010 [1 favorite]
The thing to watch out for is usurious interest rates. Anyone who is going to give you an unsecured business loan for a startup company is either 1) not actually offering an unsecured loan, or 2) going to absolutely ream you out on interest. Prime +10? +12? Could be anything, really. You may find that the cost of a truly unsecured loan is so high that you're better off either finding an actual investor or coming up with some kind of collateral and getting a more traditional loan.
Seriously, American One Unsecured? They're in the cash advance/check cashing/payday loan business. They're not going to offer you $25,000 at any kind of reasonable rate.
posted by valkyryn at 10:17 AM on December 6, 2010
Seriously, American One Unsecured? They're in the cash advance/check cashing/payday loan business. They're not going to offer you $25,000 at any kind of reasonable rate.
posted by valkyryn at 10:17 AM on December 6, 2010
Personal guarantees are very common even on asset-based loans to established small businesses in the $5 - $20M range.
posted by mullacc at 10:41 AM on December 6, 2010
posted by mullacc at 10:41 AM on December 6, 2010
This thread is closed to new comments.
Find a funding source that doesn't require you to pledge personal assets as collateral.
posted by dfriedman at 8:38 AM on December 6, 2010