When planning to start or grow a business, many owners are keen to find out how to obtain small business loans without collateral to fund their ideas. When it comes to loans, there are two major types: unsecured and secured.
The primary difference between secured and unsecured loans is that a secured loan requires an asset to act as security. In other words, it’s a collateral business loan that requires you to put something up in exchange for financing (e.g., commercial real estate or a company car).
An unsecured loan is a no-collateral loan that has no such requirement. While there are some business loans available that require no collateral, they are not as easy to find nor as readily available as a standard secured loan.
While we cannot advise on which is better for you, it’s helpful to understand both options if you’re seeking business funding.
How do traditional secured loans work?
Most people are familiar with the idea of a secured loan since they may already use lending of this type as consumers.
A mortgage, for example, is the best-known secured loan, with the collateral being your home. If you fail to make your mortgage payments, eventually, the lender would be able to repossess the property.
The whole point of setting up a secured loan is to reduce the lender’s risk. This is why so many lenders prefer to only offer this type of loan, especially to new startups that are inherently riskier.
Alternatives to collateral, or collateral under another name?
If you are looking for a no-collateral loan, there are limited options. And, even then, many lenders still reduce their risk through other requirements that give them leverage in case of default, including:
- A personal guarantee: If you take out a loan with a personal guarantee instead of a specific item of collateral, you will be making a guarantee that you, as an individual, will pay the debt should your company default on the loan.
- A blanket UCC lien: This is another option when lenders do not ask for a particular item of collateral. A blanket UCC lien may be placed on the business. That means should it default on its payments, the lender can then pursue the company’s assets as compensation for the remaining unpaid sum.
While neither of these options is something to discount from the equation completely, it is important to have a full understanding of what they entail for you and your company before signing on the dotted line.
How difficult is it to get a small business loan without collateral?
If you’re looking to get an unsecured business loan for your startup or established small business, there are a few options to consider. These include:
An SBA loan is backed by a federal agency, the Small Business Administration. This type of loan may or may not require collateral, and even new startups may get a loan with no need for collateral via an approved SBA lender (e.g., Some 7(a) loans for less than $25,000)). There are, however, other SBA loans that will require collateral, so it’s important to check before signing.
Are SBA loans hard to get?
They can be. If you’re looking for a relatively affordable form of lending, SBA loans could be the answer. Remember, though, SBA loans can take more effort to apply for, take longer to process, and they typically have rigorous eligibility requirements for approval.
To learn more about SBA loans and how to apply, check out our comprehensive guide to SBA loans.
Online long-term loans
There are many online lenders that offer short-term and long-term loans to companies. While both are “term loans,” there are some key differences to keep in mind.
For starters, a long-term loan is more traditional. The lender will advance a specific sum that will be repaid monthly over a set period of time. Though generally not as affordable as SBA loans, they are relatively affordable and applying is often faster and easier.
A short-term loan, on the other hand, also involves advancing a lump sum to the borrower, but this is then repaid in weekly or daily payments for a short period of around three to 18 months. This type of loan is usually more expensive, although it has relaxed eligibility requirements. It is also very easy to apply for when compared with traditional bank loans.
Merchant cash advances (MCAs)
Although merchant cash advances appear to require collateral, they actually do not. In fact, the financing company will only be buying your future assets—nothing you own right now.
When a business receives a merchant cash advance, the financing company is advancing a specified sum that is then paid back using a particular percentage of sales. In essence, it is purchasing a portion of the company’s future sales.
The eligibility requirements for this type of lending are comparatively loose, but there could be a risk to cash flow. It is important to proceed with caution when choosing this option, since many MCAs involve complex contracts and a variety of fees.
Before you choose an MCA, read this article comparing MCAs with SBA loans and business lines of credit.
Business credit cards
Business credit cards are certain to be something you are already familiar with, and they are actually a surprisingly good way of financing a business—especially when supplementing a traditional loan.
A zero percent introductory APR card is typically the best option since this is essentially an interest-free loan that lasts for the duration of the specified introductory period. This will vary by card and could be as long as 15 months.
If you choose this option, having a clear repayment plan in place is essential since you will need to pay off the balance before the introductory period ends and the regular APR kicks in.
Private lenders and fintech firms
These days, there are a lot of private lenders out there who are willing to offer loans without collateral, as long as the business owner offers a personal guarantee. This could be in the form of a cosigner, an asset or a commodity. Although, strictly speaking, this is not quite an unsecured loan, there are many more options for the commodities or assets that you can use.
Innovations in technology have contributed to the emergence of new fintech firms, able to provide access to financing quickly and with relatively little paperwork.
With Fundbox, you can apply for financing online without any specific collateral, and expect a credit decision in just minutes (3 minutes, actually, based on the median decision time for Fundbox customers). All Fundbox customers are subject to UCC-1 blanket liens. Learn more about how Fundbox loans work.
Weighing the options
When taking out a loan to fund your business, consider whether you really prefer an option that requires no collateral and why. If you’re concerned you may default and end up having your assets seized by the lender, it may not be the right time to seek financing.
Do you think you’ll be in a more secure financial position soon? Or do you really need that financing now, in order to improve your position and save your business? If you are feeling confident in the future success of your operation, you might choose to wait and apply for a no-collateral loan.
On the other hand, sometimes you’re not worried about losing your assets at all. Instead, you might be more concerned with speed and the ease of getting funding. Some owners spend 30 hours or more on paperwork just to apply for a conventional term loan to fund their business, while others decide they just do not have that time to spare.
If you’re simply concerned about the hassle and lengthy paperwork that a conventional loan could require, a faster fintech financing option might be what you’re seeking.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.