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Nothing Personal

How can you protect yourself and your assets from risk when securing a business loan?

Question: I've heard about nonrecourse business loans that don't require the borrower to sign personally. What are these loans, and how can I get one?

Answer: A nonrecourse loan is just a fancy name for a secured loan in which the most you stand to lose if your business defaults is the property or assets you have put up as collateral. This means the lender can't come after you personally by garnishing your wages or by forcing you or your company into bankruptcy. While banks that lend to startups and small businesses typically require collateral as well as personal guarantees, which allow them to sue borrowers who fail to make payments, other types of lenders don't. For example, businesses willing to sell their receivables (the money customers owe them but have not yet paid) may be able to obtain nonrecourse loans from factors that provide short-term working capital, says Michael Espenshade, who often serves as a "virtual CFO" for early stage companies looking to raise capital.

Another alternative is a web-based marketplace, such as Prosper.com, that matches people who have money to lend with individuals and businesses that need to borrow money immediately. The borrowers can boost lenders' confidence and obtain lower rates by joining a Prosper group and keeping current on their payments. Although Prosper's loans don't require personal guarantees, they are limited to $25,000 and can carry interest rates as high as 26 percent for borrowers with low credit scores. Late payments are reported to credit bureaus, and delinquent loans are turned over to collection agencies. Says Espenshade, "Everything in life is a trade-off."

Rosalind Resnick is founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses. She can be reached by e-mail at rosalind@abcbizhelp.com or through her website,abcbizhelp.com.

Rosalind Resnick is a New York-based freelance writer, entrepreneur, investor and author of The Vest Pocket Consultant's Secrets of Small Business Success.

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This article was originally published in the February 2008 print edition of Entrepreneur with the headline: Nothing Personal.

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