Strategies for Obtaining a Business Loan Without Asset Security
Needing a loan to fuel your small business' growth or keep it afloat during unexpected crises? You might be wondering if you'll have to provide security for the loan, called collateral.
If your business is short on assets that can be pledged for security, locating an unsecured business loan could be top priority. But fear not, unsecured loans can be found. Before diving into the application process, do your research to understand what to expect.
No-Collateral Small Business Loans Exist
You can find unsecured business loans through multiple sources, such as the Small Business Administration (SBA) and online lenders.
SBA 7(a) Loans
The SBA, offering loans for small businesses through its network of partner lenders, offers a program known as the 7(a). This program allows you to skip collateral for loans up to $50,000[1], providing relief if you only need a small amount to cover expenses.
For loans above $50,001, the SBA requires collateralization up to the loan amount[1]. However, the SBA does not deny loans based solely on a lack of collateral[1].
SBA Disaster Loans
The SBA provides disaster relief loans for businesses impacted by natural disasters or economic crises. Loans under $25,000 do not require collateral, although collateral is required for larger loans[2]. Yet again, a lack of collateral alone does not guarantee a loan denial[3].
Online and Alternative Small Business Loans
Online lenders and alternative financial institutions offer various loan options without collateral requirements:
- Term Loan
- Invoice Financing (also known as "accounts receivable financing")
- Inventory Financing
- Merchant Cash Advance
- Equipment Financing
- Purchase Order Financing
- Line of Credit
While some form of security may be required for these types of loans, it might not be physical assets[1]. For example, with invoice financing, you leverage your outstanding invoices to obtain funds[1].
With a merchant cash advance, you borrow funds based on the value of your future credit card sales. Equipment financing requires the equipment you're buying or leasing as collateral, which serves as security[1].
Peer-to-Peer (P2P) Lending
Another option for seeking unsecured business loans is peer-to-peer (P2P) lending, connecting investors with small business owners in need of loans[1]. These loans are unsecured, meaning you don't need to provide collateral.
Review Your Business Financials
Some unsecured loans may be more challenging to qualify for than others, such as SBA loans, which require businesses to meet specific requirements, such as having a minimum credit score and eligible revenues[4].
Online and alternative lenders may have more flexible criteria, making it easier to secure certain types of loans, like merchant cash advances or invoice financing, even if you have a lower credit score[4].
Assess your creditworthiness and your ability to repay the loan by checking your personal and business credit scores, updating your balance sheet, and reviewing your cash flow and business expenses[4].
Prepare for Personal Responsibility
Although you may not be providing collateral, some lenders might ask for personal guarantees or file a Uniform Commercial Code (UCC) lien[4].
A personal guarantee means you're promising to repay the debt[4]. UCC liens give lenders the right to attach your business assets if you default on the loan[5].
Consider the Terms Carefully
Before signing any loan agreement, carefully review the terms. Pay attention to factors like the interest rate, payment schedule, and loan term, as well as any associated fees[4]. Make sure you understand the length of the loan and the total cost of borrowing, when both the interest and any fees are factored in[4].
Obtaining a No-Collateral Loan Can Be Challenging
While unsecured business loans can be obtained without putting up physical assets, it may require a strong credit score and sufficient business cash flow. Additionally, some forms of unsecured loans may come with higher interest rates, making it essential to understand the terms before committing[1][2].
In summary, it's possible to find unsecured business loans through various sources. To increase your chances of approval, ensure a strong credit score, evaluate your business finances, and understand the loan terms before signing a contract.
- The SBA offers a 7(a) program for small businesses, allowing loans up to $50,000 without collateral, while loans exceeding that amount require collateralization.
- SBA disaster loans provide relief for businesses impacted by natural disasters or economic crises, with loans under $25,000 not requiring collateral.
- Online and alternative financial institutions offer unsecured loan options like term loans, invoice financing, inventory financing, merchant cash advance, equipment financing, purchase order financing, and lines of credit.
- Peer-to-peer (P2P) lending platforms connect investors with small business owners in need of loans, offering unsecured loans without collateral.
- To qualify for some unsecured loans, businesses may need to meet specific requirements, such as having a minimum credit score and eligible revenues.
- Some lenders might ask for personal guarantees or file a Uniform Commercial Code (UCC) lien, even though no collateral is being provided.
- Before signing any loan agreement, it's important to review the terms carefully, considering factors like interest rate, payment schedule, loan term, associated fees, and the total cost of borrowing.
