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4 Steps to Getting A Small Business Loan With No Collateral

The financing is available, but loan terms and requirements for approval differ widely

By Richard Best

Updated November 30, 2022

Read by Margaret James

If you require a small-business loan–either to fund your next stage of growth or to help keep your company on the right track during an unexpected crisis–one important thing to think about is whether you’ll be expected to bring collateral on the table.

Collateral serves as security for the lender in the event you fail to repay the loan and are unable to repay it for any reason. If your business is short in assets that can be secured by a pledge then obtaining a no-collateral business loan may be your top priority.

Fortunately, it’s possible to find business loans that do not require collateral as a requirement to be approved. Before applying in for any of the loans it’s essential to research the loan so that you know what to anticipate.

Key Takeaways

There are unsecured small business loans via the Small Business Administration and online lenders.

No collateral doesn’t mean that you won’t be required to accept some form of personal financial responsibility in relation to business loans.

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

The lender may be able to charge higher fees or higher interest rates for non-collateral business loans.

1. Know Your Options for No-Collateral Business Loans

The first step towards getting a business loan requiring no collateral is to determine what alternatives are available. No-collateral loans are provided by several lenders, however loan terms and conditions for approval can be very different.

SBA 7(a) Loans

It is the Small Business Administration (SBA) offers loans to small-business owners via its network of lender partners. There are a variety of SBA loan programs you might think about when you require working capital including that 7(a) program being one of the most popular. This SBA 7(a) programme does not need collateral to make loans of up to $25,000, which is helpful if you only need to borrow a lesser amount of money.1

For loans exceeding $350,000 The SBA requires lenders to secure loans in the highest amount feasible, which is in excess of maximum loan amount. If you don’t have sufficient business assets to fully protect the loan, lenders can make use of the real estate you own as collateral. However, having no collateral isn’t an issue or the reason you shouldn’t be able to get a 7(a) loan if you meet the other requirements.1

SBA Disaster Loans

In addition to 7(a) loans, the SBA also offers disaster relief loans to businesses who suffer losses associated with natural disasters as well as economic crises. For example businesses that have suffered losses due to a federal mandate to shut down could request an economic damage loan.

The amount of the down payment required of an SBA loan can range from 10 percent and 30 percent, but will depend on the specific loan and borrower.2

Similar to 7(a) loans, disaster loans that are less than $25,000 don’t need collateral. If you’re borrowing more than this amount, collateral will be not required, but again the SBA will not deny you a loan because of the absence of collateral alone.3

Small Business loans that are online and other alternatives. Loans

Alternative and online lenders may offer a variety of loans that do not require collateral to help you to meet your business’s working capital needs. The kinds of loans you could be eligible for without needing to offer collateral upfront are:

Term Amount

Invoice Financing (also called “accounts receivable financing”)

Inventory Financing

Merchant Cash Advance

Equipment Financing

Purchase Order Financing

Line of Credit

For these kinds of small-business loans There may be certain types of security that are required, but it isn’t money or another tangible item you need to provide. For instance, in the case of invoice financing, you’re borrowing your outstanding invoices to obtain money.

With a merchant cash advance it is borrowing against the amount of future receipts from your credit card. In the case of equipment financing, the item that you are leasing or buying is used as collateral for the loan.

Peer-to-peer lending is another alternative for financing small businesses that does not require collateral. The peer-to-peer loan platforms link investors to small-business owners in need of loans. Investors pool funds to pay for the loan, and owners pay back in the same way as any other loan with interest. These loans are not secured, meaning they don’t require collateral.

2. Re-examine Your Business’s Financials to Determine Whether You Qualify

Certain types of small-business no-collateral financing may be more difficult to obtain than other types. If you’re applying for one type of SBA 7(a) loan, for example, you need to have at least two years of operating experience under your belt, meet the definitions of a small business that is eligible, and have an acceptable credit score as well as the revenues SBA lenders look for. The SBA also requires that you have exhausted all other borrowing options first before applying for a 7(a) loan.4

For alternative and online lenders However, with alternative lenders the requirements could be more fluid. For example, a lower credit score might not be an obstacle in obtaining an advance on a merchant’s cash account or invoicing financing. It may also be simpler to get startup loans through alternative lenders or online which only require six months of operational experience.

The second step in getting a business loan with no collateral requirements is to evaluate your company and its financial health. That includes things like:

Checking your personal and business credit scores

The balance sheet should be updated

Making important financial documents, for instance a profit and loss statement, as well as a cash flow statement

Examining your business’s expenses and overall cash flow

The purpose is two-fold: to assess your creditworthiness to get an loan and also to determine the ability of you to repay it. Inability to pay back a loan can damage your credit score and make it harder to get any kind of loan in the future.

Some types of no-collateral loans–such as a cash advance for merchants or invoice financing–use a factor rate rather than an interest rate to calculate the cost of borrowing. Depending on the financing terms and the speed at which it’s paid in terms of time, the factor rate could easily translate into the form of a three-digit or two-digit effective APR.

3. Make sure you are prepared for a personal Guarantee or UCC Lien instead

If you are qualified for a modest business loan without needing to provide collateral, that doesn’t mean that the lender won’t ask for other conditions. Particularly, you might be asked to provide a personal guarantee, or sign the Uniform Commercial Code (UCC) lien.

Personal guarantees are what it sounds like it’s an agreement in which you personally repay the debt contracted by your business. Personal guarantees are often an essential requirement for non-collateral loans and small-business credit cards. Because the lender does not have collateral that it can attach to when you fail to pay the debt, the guarantee grants it leeway to sue you personally in order to collect a unpaid debt.

The Uniform Commercial Code lien is a little different. It is basically a blanket lien that allows a lender to attach all or any of your business assets in the event you default on a loan. So even though you didn’t put any collateral on the table in order to obtain the loan, an UCC lien could give the lender the option to attach assets in the event that you fail to pay.5

4. Take note of the terms and conditions carefully prior to signing

If you’ve submitted an application for a small-business loan without collateral and have been approved, the final step is to understand the loan conditions and terms. While reviewing the loan agreement, pay particular attention at the rate of interest, annual percent rate (APR) and the payment schedule, and the loan term.

You must know the length of time it will take you to pay off the loan off, and also what the overall cost is to once the costs and interest are factored in.

When it comes to fees, make sure to find out what fees you’re being charged. It could comprise the loan origination fee or a prepayment penalty. If your cash flow allows you to pay off the loan in a timely manner, you shouldn’t want to pay an extra fee to do so.

Finally, consider whether you need a personal guarantee or UCC lien is required in your borrowing agreement. Although you might have the best of intentions to repay the loan but it’s crucial to be aware of how these obligations could affect your company if you’re unable to hold up your word regardless of the reason.

How difficult is it to obtain a Small Business Loan?

It is difficult to secure a small business loan without a strong personal credit score and evidence of steady income from your business. If you don’t have these documents, the risk of making an loan is extremely high for a lender. Based on a range of factors, loan offers may require collateral or high rates of interest if the bank considers the applicant’s credit profile poor. The requirements can strain businesses. If you believe that your credit score or business’s revenue isn’t sufficient to warrant financing, perhaps getting alternative sources of financing, such as money from friends and family or crowdsourcing could be the best option.

Do SBA Loans Require a Down amount?

It is true that SBA loans are required to make an initial down payment. The down payment will vary dependent on the particular loan and borrower, however the typical down payment is 10%. The amount could vary and even reach 30% in certain cases.2

Can You Use SBA loans for personal use?

SBA loans can’t be allowed to be used for personal purposes. They can only be used to fund your business. This means paying for expenses for your business and expanding your business and also salaries, like your own. SBA loans can’t be used to settle your personal debt, such as your mortgage or credit card bills.

The Bottom Line

The process of obtaining the loan for your company can be a challenge, especially if you have to put collateral at risk which increases the risk for you. It is the Small Business Administration (SBA) is a fantastic resource for business owners . It offers financing options without collateral.

Other than the SBA Businesses may also be able to get loans that don’t require collateral however it is important to know the conditions before signing the contract. The loans without collateral could have different strict terms or higher interest rates. When deciding on a loan, determine what parameters work best for you and the business.