Business loan

You can turn to SBA or online lenders to help you with small business loans without collateral to finance and boost your working capital and growth.

Businesspersons may need a small business loan to sustain operations during crisis times or finance the business’s next growth stage. Most lenders require that the borrower provide personal collateral that the lender can use to reclaim their money if they cannot pay back the loan. Collateral can include tangible or intangible assets such as a vehicle, building, land, accounts receivables, intellectual property, inventory, or the owner’s assets.

What if you cannot afford collateral or your business lack valuable assets to pledge as loan security? You may wonder if getting a loan without collateral is possible or if collateral-free loans are beyond your reach.

Fortunately, you can find several business loans with no collateral as a pre-condition for approval. Nevertheless, before jumping to these credit facilities, you want to do your diligence to establish what to expect. Consider some things that can help you get a business loan without collateral:

Determine which no-collateral business loans are available for you

Before applying for a collateral-free loan, you want to establish what options are available for you. Several lenders agree to no-collateral loans, but the approval requirements and loan terms vary from one lender to the other.

SBA 7(a) Loans

You can turn to Small Business Administration (SBA) for your business loan. It often guarantees collateral-free small business loans using its network of partner lenders. If you need a working capital loan, you can opt for SBA offers loan programs like 7(a) that do not require collateral. With SBA 7(a), you can get a collateral-free loan of up to $25,000, boosting your business, especially if you lack a little boost on your working capital.

However, if you need a loan above $35,000, SBA requires that the loan be collateralized up to the loan amount. If the borrower’s business does not have enough assets to cover the loan, they can use personal real estate as collateral. Still, you can qualify for a 7(a) loan if you meet other requirements.

SBA disaster loans

If your startup has experienced losses due to a natural disaster or economic crisis, you can apply for SBA disaster loans without collateral. For instance, you can apply for a disaster or economic injury loan if the government orders a shutdown and your business experiences losses because of the closure.

The SBA can extend a 10% to 30% down payment depending on the specific borrower and loan type. Disaster loans under $25,000 are collateral-free, but if you want a loan figure above $25,000, you will be required to provide collateral. Nevertheless, if you meet other requirements, you can still qualify for a higher loan without giving collateral.

Alternative Small Business Loans

Some online lenders also offer small business loans without collateral to help you improve your working capital. Some of the collateral-free loans you can get include:

  • Term loan
  • Inventory financing
  • Purchase order financing
  • Invoice financing
  • Equipment financing
  • Merchant cash advance
  • Line credit

Though some of these credit facilities require some security measures, they do not require physical assets or cash as collateral. You may leverage your outstanding invoices (invoice financing) for the loan or borrow against the value of your future earnings (merchant cash advance).

Another popular collateral-free loan option available for you is peer-to-peer lending. These platforms connect you with investors. Investors often pool money to provide loans to small business owners, which you will pay back with interest.

Analyze your business financials to establish if you qualify

The qualification level for no-collateral small-business loans differs from one loan facility to another. For instance, if you apply for an SBA 7(a) loan, the requirement is that your business must have been operational for at least two years. Additionally, your business should fit SBA’s definition of a small business and have the right revenue capacity and minimum credit score. SBA should be your last resort; therefore, it requires that you first exhaust all lending options available before submitting your 7(a) loan application.

On the other hand, online lenders may be more lenient with their requirements. Credit scores may not impede invoice financing or merchant cash advance. Some alternative lenders may extend you a startup loan with only six-month operation history.

Before applying for these alternatives, you want to evaluate your business’s overall financial position. How can you do that?

  • Look into your business credit scores.
  • Update your balance sheet
  • Create an updated financial statement, including a cash flow and profit and loss statement.
  • Review business expenses and the general cash flow.

This evaluation aims to know your creditworthiness and determine the business’s ability to repay the loan. Defaulting on a loan will seriously harm your credit score, injuring your chances of qualifying for future loans.

Ready any personal guarantee if needed.

Some lenders who do not ask for collateral when providing small business loans may ask for other conditions. They may ask for a sign for a personal guarantee or that you sign a Uniform Commercial Code (UCC) lien.

When you sign a personal guarantee, you agree to repay the business loan personally. Most small-business credit cards and no-collateral loans require that the business owner provide personal guarantees. Since the lender has no collateral to sell if you default, the personal guarantee allows them to personally sue you for your business’s unpaid debt.

You may wonder what a Uniform Commercial Code lien is. UCC is a blanket lien, giving the lender the power to attach your business assets if you default to pay the loan. Although the small business loan was collateral-free, the UCC lien opens a back door for the lender to attach any business asset of choice should you refuse or default o pay the loan.

Carefully Consider loan terms before penning your signature

If the lender approved your small business loan without collateral, ensure you read through the loan terms and fully understand the terms and conditions. Take a look at the annual percentage rate (APR), interest rate, loan term, and repayment schedule.

Determine the loan length and calculate the total cost of borrowing by adding origination fees and interest. It is also wise to know if the fees include a prepayment penalty which can be detrimental for businesses with good cash flow.

Finally, confirm if the lender requires a UCC lien or a personal guarantee. Evaluate how the loan requirement will likely affect your business if circumstances do not allow you to pay back the loan on time.

Is it challenging to acquire a small business loan?

If you have unfavorable personal credit scores and weak proof of business revenue, it can be challenging to get small business loans to boost your operations. Without these requirements, the lender will carry greater risk. They could charge high-interest rates and need a personal guarantee to sue you if you default. If you do not have favorable credit scores and your business’s revenue is mediocre, you could use other alternatives like turning to family and friends or crowdsourcing to raise money.

The bottom line

It can be challenging to acquire a small business loan without collateral. SBA can offer you a financial lifeline without pledging collateral; however, you should meet certain requirements to qualify for these loans.

If you fall short of the SBA requirements, you can turn to online or alternative lenders for collateral-free loans. Before signing the contract, take your time to review the loan terms and interest rate to ascertain if it is what you bargain for. If not, you can borrow money from friends and family to invest in the business.

Can I use SBA loans for personal use?