If you seek a small business loan for a startup business or your next growth stage, the lender may request collateral to guarantee the loan repayment. However, it may be your top priority to secure a no-collateral loan for your business if your company lacks any assets that can serve as collateral. Fortunately, it is possible to obtain small business loans without collateral as a condition of approval. Listed below are the six popular options.
Options Available for No-Collateral Business Loans:
✅ SBA 7(a) Loans
The Small Business Administration (SBA) provides loans to small businesses through a network of lending partners. When you need working capital, you might consider several SBA loan programs, of which the 7(a) program is one of the most popular. The SBA 7(a) program does not require collateral for loans of up to $25,000, which can be beneficial if you only need a small loan.
For loans exceeding $350,000, the SBA requires lenders to use collateral to the greatest extent possible, up to the loan amount. The lender may use your real estate as collateral if you do not have enough business assets to secure the loan.
If you meet the other requirements for a 7(a) loan, not having any collateral will not affect your eligibility. For example, you must have been in business for at least two years, meet the SBA’s definition of a small business, and meet the minimum credit score and revenue requirements. The SBA also requires you to exhaust all other borrowing options before requesting a 7(a) loan.
✅ Unsecured Business Lines of Credit
A business line of credit obtained from a more traditional lender will require you to provide collateral. In recent years, many online alternative lenders have begun providing unsecured business lines of credit, which means you do not have to pledge specific assets as collateral.
A pool of funds will be available to draw upon whenever you need it. You won’t have to risk your assets to get the financing you need with an unsecured line of credit. You will repay what you borrow along with interest. Once you pay the lender back in full, your line of credit is refilled to its original amount.
However, you should be aware that you will likely be approved for less capital and a higher interest rate when applying for an unsecured business line of credit. Due to the higher risk associated with unsecured lines of credit, lenders are likely to grant less credit and charge you higher interest rates for the funds you use.
✅ Merchant Cash Advances
With a merchant cash advance program, you will receive a lump sum of capital you can use for your business, and you will repay the lender by allowing them to take a slice of your business’s daily credit card sales.
A factor rate determines the cost of borrowing instead of an interest rate for merchant cash advances. Depending on the terms and speed of repayment, the factor rate can be a two- or three-digit annual percentage rate (APR).
Suppose your business is unable to qualify for other types of business loans. In that case, merchant cash advance companies can provide your business with financing that doesn’t require collateral and accepts bad credit scores. However, you should proceed with caution because merchant cash advances are the most costly form of financing available. They should always be the last resort for financing your business.
✅ Equipment Financing
Consider applying for equipment financing if you require a loan to purchase your startup’s first batch of expensive machinery.
A loan can cover up to 100% of equipment purchases. You will own the equipment when you have repaid your lender in full.
Equipment financing is an excellent option for business owners with less than perfect credit. One of the most compelling aspects of equipment financing is that the equipment itself acts as collateral. The lender may seize the equipment if you fail to repay your loan, but your personal assets remain safe.
✅ Invoice Financing
You may want to consider invoice financing if you run a service-based business and your customers are always late paying their invoices. A lender can advance you funds for your outstanding invoices through invoice financing.
Invoice financing companies advance you a percentage of your outstanding invoices. Typically, they will retain the remaining percentage and charge fees based on how many weeks it takes your customers to pay up. You will receive the reserve amount once the customer has paid in full, minus the lender’s fees.
With invoice financing, the invoices themselves serve as collateral. If your client does not pay, the most that can be collected is the original invoice amount.
✅ Peer-to-peer lending
Another alternative for business financing is peer-to-peer lending, which does not require collateral. An online peer-to-peer lending platform connects investors to small businesses in need of capital. The loan is funded by investors pooling their funds together, and the owners pay it back the same way as any other loan with interest. These loans are unsecured, which means no collateral is required.
The Downsides of Getting Small Business Loans With No-Collateral
✔ Higher Interest Rates
In the absence of collateral, the cost of your loan may be higher. Some lenders will fund startups at a higher interest rate than more established companies or business owners with collateral. It is important to remember that increased interest rates can increase your debt by hundreds or even thousands of dollars, so make sure you understand precisely how much you will owe. Then, decide if the expense is worth it or if you are better off taking another funding route.
✔ Shorter Repayment Terms
To determine whether the loan is appropriate for your business, you should consider all the pros and cons of the repayment terms. Generally, the best repayment terms are reserved for the most creditworthy borrowers (e.g., established businesses). When you do not have collateral for a startup loan, you may have to take a short-term loan. Rather than repaying funds over an extended period, you will be expected to repay your loan more quickly – for example, within three months. Additionally, depending on the lender you choose, you may be required to make more frequent payments (weekly or bi-weekly instead of monthly).
Understanding Personal Guarantee or UCC Lien
You may obtain a business loan without the requirement of collateral. However, the lender may still ask for other conditions. In particular, you may be asked to sign a personal guarantee or agree to a lien under the Uniform Commercial Code (UCC).
Essentially, a personal guarantee is an agreement that you will personally be responsible for repaying a debt incurred by your business. Personal guarantees are usually required for loans with no collateral. Since the lender does not have collateral that it can attach if you do not pay, the deed of guarantee provides the lender with the right to sue you personally to collect an unpaid debt.
If you default on a loan, a lender can place a lien on your business assets in the form of a Uniform Commercial Code lien. The UCC lien would give the lender a backdoor way of attaching assets if you fail to pay even though you did not put any collateral on the table.
Conclusion:
Although small businesses may not have difficulty qualifying for some forms of no-collateral financing, it is essential to determine first whether you are capable of repaying the loan. Remember that defaulting on a loan can negatively affect your credit score, making it harder for you to obtain financing in the future.
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