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2. Examine Your Business’s Financials

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4 Steps to Getting an SBA Loan without Collateral

The financing is available, but loan terms and requirements for approval are not the same.

By Richard Best

Updated November 30 2022

Read by Margaret James

If you require an unsecured small-business loan — either to fund the next stage of growth or to keep your business on solid ground in case of an emergency, the first important thing to think about is whether you’ll need to bring collateral on the table.

Collateral acts as security against the lending institution in the case that you fail to repay the loan and cannot pay it back for any reason. If your company is in deficit in assets that can be secured by a pledge and you are looking for a non-collateral business loan may be your top priority.

It’s not difficult to get business loans that don’t require collateral as a condition for approval. Prior to applying for one of these loans it’s essential to conduct your own research to know what you can be expecting.

Key Takeaways

It’s possible to find unsecured commercial loans via the Small Business Administration and online lenders.

However, this doesn’t mean you don’t have to assume some level of personal financial responsibility for business loans.

Peer-to peer lending is another option for pursuing business loans that do not require collateral.

Lenders may charge higher fees or interest rates for business loans.

1. Learn about your options for no-collateral Business loans

The first step towards getting a business loan that does not require collateral is to understand what options are available. Non-collateral loans are offered by a variety of lenders, however loan terms and conditions for approval can be very different.

SBA 7(a) Loans

It is the Small Business Administration (SBA) guarantees loans for small-business owners through its network of partner lenders. There are many SBA loan programs that you could think about when you require working capital and the 7(a) program being one of the most popular. This SBA 7(a) programme does not have to require collateral in loans of up to $25,000, which is great when you need to borrow a smaller amount of money.1

For loans that exceed $350,000 for loans that exceed $350,000, the SBA requires lenders to secure loans in the highest amount possible, in excess of the loan amount. If you don’t have sufficient assets for your business to protect the loan the lender can use the personal real estate that you have as collateral. But, having no collateral at all isn’t the reason you shouldn’t be able to get an 7(a) loan if you meet the other requirements.1

SBA Disaster Loans

Alongside 7(a) loans, the SBA offers disaster relief loans for businesses that experience losses resulting from natural disasters as well as economic turmoil. For example businesses that have suffered losses due to a federal order to shut down may be eligible for an economic injury loan.

The amount of the down payment required to get an SBA loan could be anywhere between 10% and 30% but will depend on the specific loan and borrower.2

Similar to 7(a) loans, disaster loans less than $25,000 do not require collateral. If you’re borrowing over this amount, collateral will be not required, but again it’s not required. SBA won’t deny you an loan due to the lack of collateral alone.3

Online and Alternative Small Business Loans

Online and alternative lenders are able to provide a range of loans with no collateral requirements to help you to meet your business’s working capital requirements. The kinds of loans you might be able to obtain without needing to offer collateral in advance are:

Term Amount

Invoice Financing (also called “accounts for receivables”)

Inventory Financing

Merchant Cash Advance

Equipment Financing

Purchase Order Financing

Line of Credit

With these types of financing for small businesses it is possible that there is some type of security required, but it isn’t money or another tangible item you need to provide. For example, with invoicing financing, it’s borrowing your outstanding invoices to obtain money.

When you take advantage of a cash advance from a merchant it is borrowing against the amount of future credit card receipts. And in the case of equipment financing, the equipment you lease or purchase acts as collateral for the loan.

Peer-to-peer lending is a different option for small-business financing that doesn’t require collateral. These lending services connect potential investors to entrepreneurs who require loans. Investors pool their funds to pay for the loan and owners repay it in the same way as any other loan, with interest. These loans are secured, which means that there is no collateral required.

2. Examine Your Financials for Your Business to Determine Whether You Qualify

Certain types of small-business no-collateral financing are more difficult to obtain than other types. With one type of SBA 7(a) loan, for example, you need to be able to show at least two years of operational history in your resume, be in compliance with the SBA’s definition of a qualified small-business, and have at least the required credit rating and revenue SBA lenders require. The SBA also demands that you have exhausted the other options for borrowing before submitting an application for the 7(a) loan.4

With online and alternative lenders On the other hand the requirements are more fluid. For example, a lower credit score might not be an obstacle to obtaining an advance on a merchant’s cash account or invoice financing. It may also be simpler to obtain start-up loans from online or alternative lenders which only require six months of operating history.

The next step to obtain a business loan that does not require collateral is evaluating your company’s financial standing and its financial health. That includes things like:

Checking your personal and business credit scores

Update your balance sheet

The creation of key financial documents, like a profit and loss statement as well as the cash flow statement

Reviewing your business expenses and overall cash flow

The purpose is two-fold: to assess your creditworthiness to get a loan and to assess the ability of you to repay it. Failure to pay back the loan can damage your credit score which makes it more difficult to obtain any type of loan in the future.

Certain types of loans that don’t require collateral, such as a cash advance for merchants or invoice financing–rely on factors rather than an interest rate to determine the cost of borrowing. Based on the terms of the loan and the time it takes to repay the factor rate could easily translate into an inverse or three-digit effective APR.

3. Make sure you are prepared for a personal Warranty or UCC Lien in lieu

If you are qualified for a modest business loan without having to offer collateral, it doesn’t mean the lender won’t ask for other conditions. Specifically, you may be required to make a personal guarantee or agree to a Uniform Commercial Code (UCC) lien.

Personal guarantees are what it looks like it’s an agreement in which you personally pay back the debt you’ve that your company has taken on. Personal guarantees are typically required for no-collateral loans and credit cards for small businesses. Because the lender does not have collateral that it can attach to in the event of a default the debt, the guarantee grants it the right to sue you to collect an unpaid debt.

The Uniform Commercial Code lien may be a little different. It’s essentially the term used to describe a blanket lien, which permits the lender to take possession of all or any of your business property in the case that you are in default on a loan. Even if you didn’t offer any collateral on the table to get the loan in the first place, the UCC lien could give the lender a backdoor option to attach assets in the event that you don’t pay.5

4. Consider the Terms Carefully Before Signing

If you’ve submitted an application for a small-business loan without collateral and have been approved, the last step is understanding the loan conditions and terms. When reading your loan agreement, pay attention to the interest rate, annual percent rate (APR) and the payment schedule, and the loan duration.

You need to be aware of the time it will take to pay off the loan off and what your amount of debt is to when the costs and interest are included.

When it comes to fees, make sure for the fees you’re paying. For instance, that might comprise the loan origination charge or a prepayment penalty. If your cash flow allows you to pay off the loan earlier, you do not want to pay a penalty to do it.

Finally, consider whether you need a personal guarantee or UCC lien is required as part of the loan agreement. Although you might have the best of intentions to repay the loan but it’s crucial to understand how these requirements might affect your company if you are unable to meet your commitments for any reason.

Is it difficult to get a Small Business Loan?

It is difficult to get a small business loan without a high personal credit score as well as proof of regular income from your company. In the absence of these requirements, the chance of getting an loan is extremely high for lenders. In the event of a wide range of aspects, loan offers may require collateral or high rates of interest if a bank considers the applicant’s credit profile less than solid. These requirements may strain businesses. If you feel the credit rating of your business’s revenues are not sufficient enough, then perhaps obtaining financing by other means, such as cash from family and friends or crowdsourcing could be a better choice.

Do SBA Loans Require a Down amount?

It is true that SBA loans do require a down payment. The amount of the down payment can vary dependent on the particular loan and the borrower. However the typical down payment is 10 percent. The amount may vary, and can up to 30% in certain cases.2

Can You Make Use of SBA loans for personal use?

SBA loans are not allowed for personal use. The funds are only available for your business. This includes paying for business expenses, expanding your business, and salaries, such as your own. SBA loans cannot be used to pay down your personal debts like your mortgage or personal credit card debts.

The Bottom Line

The process of obtaining the loan for your business could be a challenge, especially if you are required to put collateral in place which increases the risk to you. It is the Small Business Administration (SBA) is a fantastic source for entrepreneurs that offers financing options without the need for collateral.

Outside of the SBA companies can also obtain loans without collateral, however it’s crucial to be aware of the terms prior to entering into the loan contract. The loans without collateral could have different strict terms or higher interest rates. If you are deciding to take out a loan, determine what parameters will be most suitable for your needs and your company.