Your Business

Can I Get a Small Business Loan Without Collateral?

By Irene Malatesta

When planning to start or grow a businesses, 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, you need collateral. An unsecured loan has no such requirement. While there are some business loans available that require no collateral, they are not as easy to find or as readily available as a standard secured loan. It’s good 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 already use lending of this type. 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 eliminate 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 risky.

Alternatives to collateral, or collateral under another name?

If you are looking for a loan that requires no collateral, you only have a few options. And, even then, many of those facilities simply require collateral under another name. There are few loans that are truly unsecured. Sometimes, a loan may not be secured by a specific collateral item, such as a car or house, but it will be secured in another way. For example, it can be done by one of the following options:

  • 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.

Weighing your business funding options

 

How difficult is it to get a small business loan without collateral?

There are a few options when it comes to getting a small business loan without collateral. These include:

SBA loans

An SBA loan is backed by a federal agency, the Small Business Administration. This type of loan usually requires no collateral, and even new startups may get a loan with no need for collateral via the SBA. There are, however, some SBA loans that will require collateral, so it’s important to check before signing.

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. 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. Although not quite 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, in fact, the financing company will only be buying your future assets. When a company 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 intro period. This will vary by card and could be as much as 15 months. Having a clear repayment plan in place is essential since you will need to pay off the balance before the introduction period ends and the regular APR kicks in.

Private lenders and fintech firms

These days, there are lot of private lenders are 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 appearance 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 collateral, and expect a credit decision in just minutes. (3 minutes, actually, based on the media decision time for Fundbox customers.) Any U.S. business owner with at least 3 months of business transaction history and a business bank account may be eligible for funds.

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 loan that does require collateral.

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 even more on paperwork, just to apply for a conventional term loan to fund their business, while others decide they just don’t 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.

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