1. Be aware of your options
2. Examine Your Business’s Financials
3. Personal Guarantee or UCC Lien
4. Review before signing
Small Business Loan FAQs
The Bottom Line

Business Small Business

Four Steps to Getting A Small Business Loan With No Collateral

The loan is available, however loan conditions and approval requirements vary widely
By Richard Best
Updated November 30, 2022
Review by Margaret James

When you need a small-business loan–either to fund the next stage of growth or to keep your company on the right track in case of an emergency, the first important thing to think about is whether you’ll be expected to bring collateral on the table.

Collateral acts as an insurance policy against the lending institution in the case that you are in default on the loan and can’t repay it for any reason. If your company is in deficit on assets that could be used as security then obtaining a no-collateral business loan might be your highest priority.

It’s not difficult to get commercial loans that do not need collateral as a prerequisite for approval. Before applying in for any of the loans, it’s important to research the loan so you know what to anticipate.
Important Takeaways

It’s possible to find unsecured business loans via the Small Business Administration and online lenders.
The absence of collateral doesn’t mean you don’t have to take on some degree of personal financial responsibility in relation to business credit.
Peer-to peer lending is another option for pursuing business loans that do not require collateral.
Lenders may charge higher fees or rates for business loans.

1. Know Your Options for No-Collateral Business Loans

The first step towards getting a business loan that doesn’t require collateral is to know which options are available. Non-collateral loans are provided by various lenders, however loan terms and conditions for approval can be very different.
SBA 7(a) Loans

It is the Small Business Administration (SBA) guarantees loans for small-business owners through its network of lender partners. There are a variety of SBA loan programs that you could look into if you require working capital, with one of them, the 7(a) program being one of the most well-known. This SBA 7(a) Program does not require collateral for loans of up to $25,000, which is great when you need to borrow a small amount of money.1

For loans that exceed $350,000 for loans that exceed $350,000, the SBA requires lenders to secure loans to the maximum extent possible, as much as the loan amount. If you don’t have sufficient business assets to fully guarantee the loan the lenders may use the personal real estate that you hold as collateral. However, having no collateral whatsoever isn’t the reason you shouldn’t be able to get an 7(a) loan if you meet the other requirements.1
SBA Disaster Loans

Alongside 7(a) loans, the SBA offers disaster relief loans to businesses who suffer losses resulting from natural disasters, as well as economic crisis. So, for example the business that has suffered losses due to a federal directive to shut down might apply for an economic injury loan.

The down payment for an SBA loan can range from 10% and 30% but will depend on the specific loan and borrower.2

Similar to 7(a) loans, disaster loans less than $25,000 do not require collateral. If you’re borrowing over that amount, collateral is expected, but, again the SBA will not deny you an loan because of the absence of collateral alone.3
Small Business loans that are online and other alternatives. Loans

Online and alternative lenders are able to provide a variety of loans without collateral requirements to achieve your business’ working capital requirements. The types of financing that you may be able to get without having to provide collateral in advance are:

Term The loan
Invoice Financing (also called “accounts for receivables”)
Inventory Financing
Merchant Cash Advance
Equipment Financing
Purchase Order Financing
Line of Credit

With these types of small-business loans There may be some type of security required however it’s not cash or any other physical item you need to provide. For example, with invoicing financing, it’s borrowing your outstanding invoices to borrow money.

With a merchant cash advance is a loan against the amount of your future credit card transactions. If you’re using equipment financing, the item you’re buying or leasing acts as collateral to the loan.

Peer-to-peer lending is another option for small-business financing that does not require collateral. Peer-to-peer lending platforms connect investors to entrepreneurs who require loans. Investors pool money together to pay for the loan and owners pay back the same as any other loan, with interest. These loans are secured, which means that there is no collateral required.
2. Re-examine Your Business’s Financials to determine if you qualify

Certain types of small-business no-collateral finance may be more difficult to get than others. With one type of SBA 7(a) loan, for example, you need to have at minimum two years of operational history under your belt, meet the SBA’s definition of a qualified small-business and possess at least the required credit rating and the revenues SBA lenders look for. The SBA also insists that you exhaust all other borrowing options prior to applying for a 7(a) loan.4

For alternative and online lenders On the other hand the requirements could be more flexible. For instance, a low credit score may not be an obstacle to obtaining the merchant cash advance or invoicing financing. And it may be easier to get startup loans from online lenders or other lenders that only require six months of operating experience.

The second step in getting a business loan that does not require collateral is evaluating your business and its financial standing. That means doing things like:

Verifying your personal and company credit scores
Update your balance sheet
Making important financial documents, like a profit and loss statement and cash flow statements
Examining your business’s expenses and overall cash flow

The goal is two-fold: to assess your creditworthiness for the loan and also to determine the ability of you to pay it back. Inability to pay back the loan could damage your credit score, making it more difficult to get any kind of loan in the future.

Some loans with no collateral such as a merchant cash advance or invoice financing — use factor rates instead of an interest rate to calculate the amount of borrowing. Based on the terms of the loan and the speed at which it’s paid in terms of time, the factor rate could easily be converted into the form of a three-digit or two-digit effective APR.
3. Be prepared for a Personal Warranty or UCC Lien instead

If you are qualified for a modest business loan without needing to provide collateral, it doesn’t mean the lender won’t require other conditions. In particular, you could be asked to provide a personal guarantee, or consent to the Uniform Commercial Code (UCC) lien.

A personal guarantee is just what it is it’s an agreement in which you personally pay back the debt you’ve that your company has taken on. Personal guarantees are often required for no-collateral loans and credit cards for small businesses. Because the lender does not have collateral it can attach in the event of a default, the guarantee gives it leeway to sue you personally in order to collect a unpaid debt.

An Uniform Commercial Code lien is different. This is essentially a blanket lien that allows the lender to take over all or any of your company’s property in the case that you fail to pay a loan. So even though you didn’t provide any collateral to the table in order to obtain the loan in the first place, the UCC lien can provide the lender a backdoor option for attaching assets if you fail to pay.5
4. Consider the Terms Carefully Before signing

If you’ve submitted an application for a small business loan without collateral and have been approved, the final step is understanding the loan terms and conditions. When reading your loan contract, be sure to pay particular attention on the rates of interest and the annual percent rate (APR) and the payment schedule, as well as the loan period.

You must know the length of time it will take you to pay off the loan off and what your amount of debt adds up to once the costs and interest are included.

When it comes to fees, make sure for the charges you’re charged. For instance, it could include a loan origination fee or prepayment penalty. In the event that your current cashflow permits for you to repay the loan earlier, you do not have to incur an extra fee to do so.

Also, think about whether you need a personal guarantee or UCC lien is required as part of your borrowing agreement. Although you might have the best of intentions to pay back the loan, it’s important to know how these conditions could impact your business in the event that you’re not able to fulfill your end of the bargain in any way.
How difficult is it to obtain a Small Business Loan?

It is difficult to get a small business loan without a strong personal credit score and evidence of steady income from your company. If you don’t have these documents, the chance of making the loan is very high for a lender. Depending on a variety of factors, loan offers may require collateral or high rates of interest if a bank deems an applicant’s profile less than solid. These requirements may strain a business. If you believe that your credit score or your business’s revenues are not sufficient enough, then perhaps obtaining financing by other means, such as cash from family and friends or crowdsourcing could be a better option.
Do SBA Loans Require a Down amount?

Absolutely, SBA loans do require an initial down payment. The amount of the down payment can vary depending on the specific loan and borrower; however, a common down payment is 10 percent. This amount can range and up to 30% in certain cases.2
Are you able to use SBA loans for personal use?

SBA loans are not permitted for personal use. They can only be used to fund your business. This means the cost of expenses for your business and expanding your business and also salaries, like your own. SBA loans cannot be used to pay down your personal debts for example, your mortgage or credit card debts.
The Bottom Line

The process of obtaining a loan for your company can be difficult, particularly if you need to place collateral at risk which increases the risk to you. It is the Small Business Administration (SBA) is an excellent resource for business owners . It can provide financing without the need for collateral.

Outside of the SBA companies are able to obtain loans that don’t require collateral but it’s crucial to be aware of the terms prior to making a decision to sign the agreement. Loans without collateral may have additional strict conditions or high interest rates. When you’re deciding on a loan be sure to determine the conditions that work best for you and your company.
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