Financing is available, but loan terms and approval criteria vary greatly.
When you need a small-business loan, whether to fund your next stage of growth or to keep your company afloat during an unexpected crisis, one thing to consider is whether you'll be required to provide collateral.
Collateral serves as security for the lender in the event that you fail to repay the loan for any reason.
If your company lacks assets that could be pledged as collateral, obtaining a no-collateral business loan may be your top priority.
Fortunately, there are business loans available that do not require collateral as a condition for approval. Before applying for one of these loans, do your homework so you know what to expect.
KEY LESSONS
Unsecured business loans are available from the Small Business Administration and online lenders.
Because there is no collateral, you will be required to assume some level of personal financial responsibility for business debt.
Another option for obtaining business loans without collateral requirements is peer-to-peer lending.
For no-collateral business loans, lenders may charge higher fees or interest rates.
1Understand Your No-Collateral Business Loan Options
The first step in obtaining a business loan with no collateral is to understand the options available. A variety of lenders offer no-collateral loans, but loan terms and approval requirements can vary greatly.
Through its network of partner lenders, the Small Business Administration (SBA) guarantees loans for small-business owners. When you need working capital, there are several SBA loans programs to consider, with the 7(a) program being one of the most popular. The SBA 7(a) program does not require collateral for loans of up to $25,000, which is advantageous if you only need a small sum of money.
The SBA mandates that lenders secure loans over $350,000 with collateral to the fullest extent feasible and up to the loan amount. Lenders may use your personal property as collateral if you don't have enough business assets to fully secure the loan. Even if you don't have any collateral, you can still get a 7(a) loan if you meet the other requirements.
Businesses that have suffered losses as a result of natural disasters or economic downturns can also apply for disaster relief loans from the SBA in addition to 7(a) loans. An organization that has lost money as a result of a government order to close its doors, for instance, could apply for an economic injury loan.
Pro tip
Depending on the loan and borrower, an SBA loan's down payment can be anywhere between 10% and 30%.
Disaster loans under $25,000, like 7(a) loans, do not require collateral. If you borrow more than that amount, collateral is required, but the SBA will not deny you a loan solely because you lack collateral.
- Alternative and Online Small Business Loans
Online and alternative lenders can provide a variety of loans with no collateral requirements to assist you in meeting the working-capital needs of your business. You may be able to obtain the following types of financing without having to provide collateral upfront:
● Term loan
● Invoice financing (also known as "accounts receivable financing")
● Inventory Financing
● Merchant Cash Advance
● Equipment Financing
● Purchase Order Financing
● Credit Line
There may be some type of security required with these types of small-business financing, but it isn't cash or another physical asset you have to offer. For example, with invoice financing, you borrow money by leveraging your outstanding invoices.
When you obtain a merchant cash advance, you borrow money against the value of your upcoming credit card receipts. When using equipment financing, the equipment you buy or lease acts as security for the loan.
Another option for small-business financing that does not require collateral is peer-to-peer lending. Platforms for peer-to-peer lending connect investors with small-business owners in need of loans. Investors pool their funds to fund the loan, and owners repay it with interest, just like any other loan. These loans are unsecured, which means no collateral is required.
2Examine Your Company's Financials to See If You Qualify
Certain types of no-collateral small-business financing may be more difficult to obtain than others. For instance, in order to qualify for an SBA 7(a) loan, you must have been in business for at least two years, conform to the SBA's definition of an eligible small business, and meet the lender's minimum credit and revenue requirements. The SBA states that you must use up all other borrowing options before requesting a 7(a) loan.
Online and alternative lenders, on the other hand, may have more flexible requirements. For instance, getting invoice financing or merchant cash advances may not be hampered by a low credit score. Additionally, it might be simpler to get start-up loans from online or alternative lenders who only require six months of operating history.
Finding a business loan without a collateral requirement requires you to first evaluate your company's overall financial standing. This entails actions such as:
● Examining your personal and business credit ratings
● Making changes to your balance sheet
● Developing critical financial documents such as a profit and loss statement and a cash flow statement
● Examining your company's expenses and overall cash flow
Assessing your creditworthiness for a loan and your ability to repay it are the two main objectives. Your credit score may suffer if you don't pay back a loan on time, which will make it harder to get financing in the future.
Important
Some no-collateral loans, such as merchant cash advances or invoice financing, calculate the cost of borrowing using a factor rate rather than an interest rate. Depending on the terms and speed of repayment of the financing, the factor rate can easily translate to a two- or three-digit effective APR.
3Expect a Personal Guarantee or UCC Lien instead
The lender may still impose additional conditions even though you might be able to get a small business loan without putting up any collateral. You may be asked to sign a personal guarantee or agree to a Uniform Commercial Code (UCC) lien, for example.
A personal guarantee is exactly what it sounds like: an agreement that you will personally repay the debt incurred by your company. No-collateral loans and small-business credit cards frequently require personal guarantees. The guarantee enables the lender to sue you personally to recoup an unpaid debt because there is no collateral against which to attach if you default on payments.
A Uniform Commercial Code lien is distinct. This is essentially a blanket lien that allows a lender to seize any or all of your company's assets if you default on a loan. Even if you didn't put up any collateral to get the loan, a UCC lien would give the lender a backdoor option for attaching assets if you defaulted.
4Before signing, carefully read the terms
The next step after applying for and receiving approval for a small business loan without collateral is to comprehend the terms and conditions of the loan. When reading the loan agreement, pay close attention to the interest rate, annual percentage rate (APR), payment schedule, and loan term.
You must understand how long it will take to repay the loan and what your total cost of borrowing will be after interest and fees are deducted.
In terms of fees, check to see what you're being charged. For example, there could be a loan origination fee or a prepayment penalty. You don't want to pay a penalty if your cash flow allows you to pay off the loan early.
Finally, consider whether your borrowing agreement requires a personal guarantee or a UCC lien. While you may have good intentions to repay the loan, it's critical to understand how these requirements may affect your business if you are unable to keep your end of the bargain for any reason.
Frequently Asked Questions and Answers
- Is it difficult to obtain a small business loan?
Without strong personal credit and evidence of consistent business revenue, it may be challenging to get a small business loan. A lender faces a high risk of making a loan without these. If a bank considers an applicant's profile to be less than solid, loan offers may require collateral or high-interest rates.
A company might be under pressure from these requirements. If you believe your credit score or business revenues are insufficient, seeking financing through other means, such as money from friends and family or crowdsourcing, maybe a better option.
- Is a down payment required for SBA loans?
Yes, a down payment is required for SBA loans. The down payment will vary depending on the loan and borrower, but a typical down payment is 10%. In some cases, this amount can be as high as 30%.
- Can SBA Loans Be Used for Personal Purposes?
Personal use of SBA loans is not permitted. The money can only be used for your company. This includes paying for business expenses, expanding your business, and paying your own salary. SBA loans cannot be used to pay off personal debts such as mortgages or credit card bills.
In conclusion
It can be challenging to get a loan for your company, especially if you have to put up collateral, which raises your risk. Due to its availability of financing without the requirement of collateral, the Small Business Administration (SBA) is a fantastic resource for business owners.
Outside of the SBA, businesses can obtain loans without collateral, but it's important to read the fine print before agreeing to anything. For loans without collateral, additional strict conditions or high-interest rates may be present. When choosing a loan, consider the criteria that will benefit you and your company the most.
