When you need a small-business loan—either to fund your next stage of growth or to keep your business on solid ground during an unexpected crisis—one thing to consider is whether you’ll be expected to bring collateral to the table.
Collateral acts as security for the lender in the event that you default on the loan and can’t repay it for any reason. If your business is short on assets that could be pledged as security, finding a no-collateral business loan may be your top priority.
Fortunately, it’s possible to find business loans that don’t require collateral as a condition for approval. Before applying for one of these loans, it’s important to do your research so you know what to expect.
- It’s possible to find unsecured business loans through the Small Business Administration and online lenders.
- No collateral doesn’t mean that you won’t be required to assume some level of personal financial responsibility for business debt.
- Peer-to-peer lending is another option for pursuing business loans with no collateral requirements.
- Lenders may charge higher fees or interest rates for no-collateral business loans.
1. Know Your Options for No-Collateral Business Loans
The first step in getting a business loan requiring no collateral is to know which options are available. No-collateral loans are offered by a variety of lenders, but loan terms and approval requirements can be very different.
SBA 7(a) Loans
The Small Business Administration (SBA) guarantees loans for small-business owners through its network of partner lenders. There are several SBA loan programs you might consider when you need working capital, with the 7(a) program being one of the most popular. The SBA 7(a) program doesn’t require collateral for loans of up to $25,000, which is helpful if you only need to borrow a smaller amount of money.
For loans greater than $350,000, the SBA requires lenders to collateralize loans to the maximum extent possible, up to the loan amount. If you don’t have sufficient business assets to fully secure the loan, lenders can use the personal real estate you own as collateral. Still, not having any collateral at all isn’t a barrier to getting a 7(a) loan if you meet the other requirements.
SBA Disaster Loans
In addition to 7(a) loans, the SBA offers disaster relief loans for businesses that experience losses associated with natural disasters as well as economic crises. So, for example, a business that’s experienced losses due to a government mandate to shut down could apply for an economic injury loan.
The down payment for an SBA loan can be between 10% and 30% but will depend on the specific loan and borrower.
Similar to 7(a) loans, disaster loans under $25,000 don't require collateral. If you’re borrowing more than that amount, collateral is expected, but, again, the SBA won’t deny you a loan based on lack of collateral alone.
Online and Alternative Small Business Loans
Online and alternative lenders can offer a variety of loans without collateral requirements to help you meet your business’ working-capital needs. The types of financing you may be able to get without having to provide collateral upfront include:
- Term Loan
- Invoice Financing (also known as “accounts receivable financing”)
- Inventory Financing
- Merchant Cash Advance
- Equipment Financing
- Purchase Order Financing
- Line of Credit
With these types of small-business financing, there may be some type of security required, but it isn’t cash or another physical asset you have to offer. For example, with invoice financing, you’re leveraging your outstanding invoices to borrow money.
With a merchant cash advance, you’re borrowing against the value of your future credit card receipts. And in the case of equipment financing, the equipment you’re buying or leasing serves as collateral for the loan.
Peer-to-peer lending is another option for small-business financing that doesn’t require collateral. Peer-to-peer lending platforms connect investors with small-business owners who need loans. Investors pool money together to fund the loan, and owners pay it back the same as any other loan, with interest. These loans are unsecured, meaning there’s no collateral needed.
2. Review Your Business Financials to Determine Whether You Qualify
Some types of no-collateral small-business financing may be more difficult to qualify for than others. With an SBA 7(a) loan, for instance, you must have at least two years of operating history under your belt, meet the SBA’s definition of an eligible small business, and have the minimum credit score and revenues SBA lenders look for. The SBA also requires that you exhaust all other borrowing options first before applying for a 7(a) loan.
With online and alternative lenders, on the other hand, the requirements may be more fluid. For example, a lower credit score may not be an obstacle to getting a merchant cash advance or invoice financing. And it may be easier to get startup loans from online or alternative lenders that only require six months of operating history.
The second step in getting a business loan with no collateral requirements is evaluating your business and its overall financial position. That means doing things like:
- Checking your personal and business credit scores
- Updating your balance sheet
- Creating key financial documents, such as a profit and loss statement and a cash flow statement
- Reviewing your business expenses and overall cash flow
The purpose is twofold: to determine your creditworthiness for a loan and to assess your ability to pay it back. Failing to repay a loan can damage your credit score, making it more difficult to obtain any type of financing in the future.
Some types of no-collateral loans—such as a merchant cash advance or invoice financing—use a factor rate rather than an interest rate to determine the cost of borrowing. Depending on the financing terms and how quickly it’s repaid, the factor rate can easily translate to a two- or three-digit effective APR.
3. Be Prepared for a Personal Guarantee or UCC Lien Instead
While you may be able to get a small business loan without having to offer collateral, that doesn’t mean the lender won’t ask for other conditions. Specifically, you may be asked to sign a personal guarantee or agree to a Uniform Commercial Code (UCC) lien.
A personal guarantee is what it sounds like: an agreement that you’ll personally repay the debt taken on by your business. Personal guarantees are often a requirement for no-collateral loans and small-business credit cards. As the lender has no collateral it can attach if you don’t pay, the guarantee gives it leeway to sue you personally to collect an unpaid debt.
A Uniform Commercial Code lien is a little different. This is essentially a blanket lien that allows a lender to attach any or all of your business assets in the event that you default on a loan. So even though you didn’t put any collateral on the table to get the loan, a UCC lien would give the lender a backdoor option for attaching assets if you fail to pay.
4. Consider the Terms Carefully Before Signing
If you’ve applied for a small-business loan without collateral and have been approved, the final step is understanding the loan terms and conditions. When reviewing the loan agreement, pay attention to the interest rate, annual percentage rate (APR), the payment schedule, and the loan term.
You need to know how long it will take you to pay the loan off and what your total cost of borrowing adds up to when the interest and fees are factored in.
Speaking of fees, check to see which fees you’re being charged. For instance, that might include a loan origination fee or prepayment penalty. If your cash flow allows you to pay off the loan early, you don’t want to pay a penalty to do it.
Finally, consider whether a personal guarantee or UCC lien is required as part of your borrowing agreement. While you may have the best of intentions to repay the loan, it’s important to understand how these requirements might affect your business if you’re unable to hold up your end of the bargain for any reason.
Is It Hard to Get a Small Business Loan?
It can be difficult to get a small business loan without a good personal credit score and proof of stable revenues from your business. Without these, the risk of making a loan is high for a lender. Depending on a variety of factors, loan offers may require collateral or high interest rates if the bank deems an applicant's profile less than solid. These requirements may strain a business. If you feel your credit score or business's revenues are not sufficient enough, then perhaps obtaining financing by other means, such as money from friends and family or crowdsourcing, may be a better option.
Do SBA Loans Require a Down Payment?
Yes, SBA loans do require a down payment. The down payment will vary depending on the specific loan and borrower; however, a common down payment is 10%. This amount can range and be as high as 30% in some cases.
Can You Use SBA Loans for Personal Use?
SBA loans are not allowed for personal use. The funds can only be used 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 debt, such as your mortgage or personal credit card bills.
The Bottom Line
Obtaining a loan for your business can be challenging, especially when you are required to put collateral on the line, increasing the risk for you. The Small Business Administration (SBA) is a great resource for business owners that provides financing opportunities without the need for collateral.
Outside of the SBA, businesses can also obtain loans without collateral, though it's important to understand the terms before signing the contract. Loans without collateral may have other strict terms or high interest rates. When deciding on a loan, determine what parameters work best for you and the business.