Security Interests
Many lenders will require you to put up valuable property (called "security" or "collateral") that they can sell to collect their money if you don't make your loan payments. For example, a lender may take a second mortgage or deed of trust on your house, or ask for a security interest or lien on your business's equipment, inventory, or accounts receivable.
Personal Liability
Depending on how your business is organized, if you don't make good on your repayment commitment, a lender has the right to sue you individually (if your business is a sole proprietorship or general partnership) or sue your business entity (if your business is organized as a corporation or a limited liability company). If the lender sues you individually, it can take your personal assets to satisfy the loan. If the lender sues your business entity, it can take the business’s assets.
Cosigners, Guarantors, and Personal Guarantees
A lender may also require that someone cosign or guarantee the loan. That means the lender will have two people rather than one to collect from if you don't make your payments. When asking friends or relatives to cosign or guarantee a promissory note, be sure they understand that they're risking their personal assets if you don't repay the loan.
If you’ve organized your business as a limited liability entity, such as a corporation or an LLC, the lender will probably ask you -- the business owner -- to personally guarantee the loan and/or pledge your personal assets to guarantee repayment. (Because small businesses have high failure rates, lenders feel more comfortable if business owners have a personal stake in repaying the money.) Be aware that guaranteeing or personally cosigning your business’s loan circumvents your limited liability status. All of your separate property, and either half or all of any property you jointly own with a spouse (depending on which state you live in), could eventually be seized if you default on the loan.
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