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NGExpert financial copywriter
Page written by Chris Godfrey. Last reviewed on October 8, 2024. Next review due October 1, 2025.
Lenders often demand collateral when small businesses apply for a business loan. But what do you do if you don’t have sufficient collateral, or you don’t want to give a personal guarantee? No collateral business loans are designed to give small businesses the funds they need without signing over their key assets. Read on to learn more about no-collateral business loans, how they work and what you need to get one.
A no-collateral business loan, (also known as an ‘unsecured loan’), is exactly what it sounds like – you borrow money and provide no assets as security to the lender. This means the lender carries more risk, because if you default, they have no easy way to get their money back.
In reality, it’s tough to get a small business loan without providing collateral. Even if you don’t give the lender a lien on an any assets you own, they will usually demand a personal guarantee. This means you personally promise to repay the loan if your business defaults. In such event, the lender can seize your home, personal savings and other assets to get their money back. Alternatively, the lender may file a Uniform Commercial Code (UCC) lien against your business. This essentially collateralizes all the assets of your business during the life of the loan.
Collateral – typically called ‘security’ or ‘guarantee’ in loan documents – is tangible property that borrowers own and offer to lenders as a backstop when they ask for a loan. The lender places a lien on these assets – usually real estate, vehicles, business machinery or other valuables – and can seize and sell them to get their money back if the borrower defaults on the loan.
Collateral gives lenders more comfort and can incentivize them to grant a business loan. They know they can get their money back if things go wrong. Collateral also places more pressure on the borrower and gives them a big incentive to pay the loan back. Losing your home is no joke.
In contrast, no collateral loans place more stress on the lender and less on the borrower, which is why most lenders demand security when approving your loan application. Small business owners that do not have assets as collateral and do not want to provide a personal guarantee will usually require strong credit, good finances, excellent cash flow and at least two or three successful years in operation to qualify.
Although it is possible to get a small business term loan of $100,000 or more without providing collateral, borrowers may find it easier to get the funds they need with a loan that collateralizes the things being financed – such as business invoices, credit card sales, vehicles, plant and machinery. In most cases, these types of alternative loans do not require the borrower to provide extra security.
If you want to get a small business loan without providing collateral, there are several ways to go:
Online lenders tend to have more relaxed loan qualifying rules than banks and credit unions, so they can be a good place to look for a no collateral loan. Applications are typically streamlined, easy to complete and you can get a ‘yes’ or ‘no’ very quickly – sometimes in just a few minutes. However, unsecured online business loans usually come with higher interest rates and fees than loans from traditional lenders.
Some banks and credit unions may offer unsecured small business loans, although you may need to search hard to find them. If they do offer no collateral loans, banks usually provide them as a term loan – which is one lump sum paid upfront – or as a business line of credit – where you can draw money as you need it, up to a preset limit. The best aspect of a business line of credit is that you only pay interest on the sum you withdraw, not the whole line. This can reduce borrowing costs. Note that interest rates from banks and credit unions are usually very competitive, but these lenders typically have the strictest loan qualifying rules.
SBA loans are provided by banks, credit unions and online lenders who are part of the Small Business Administration (SBA) lender network. These loans are partially backed by the US Government and often come with very competitive interest rates and fees. SBA loans of up to $50,000 can be obtained without providing collateral, but it is mandatory that every owner with more than 20% equity in the borrower’s business provides a personal guarantee.
If none of the options above work for you, then you could consider these alternative business loans:
Also known as account receivables financing, this type of loan allows you to borrow against the value of your unpaid invoices and is best for B2B organizations. The lender will usually provide up to 95% of the invoice value within a few days or even hours of the bill being raised. Your invoices act as security for the loan, no added collateral is required.
Available for businesses that accept customer payments by credit and debit card. You borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the loan back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required.
Functions like a merchant cash advance but with higher borrowing limits. Based on the size and regularity of their total revenues, (not just their credit card sales), businesses may receive a lump sum and pay it back over a short-term schedule, typically by small deductions from their daily sales. This type of loan can usually be secured quickly as qualification rules are less intensive and credit scores are not so critical. Once again, your sales act as security for the loan and no added collateral is required.
Buying big ticket machinery and equipment can put a major dent in your cashflow, but equipment loans can pay for new or used plant and machinery without causing financial stress. Equipment loans are ‘self-collateralizing’ – they use the asset you’re financing as security, similar to a car loan or a residential mortgage, so no added collateral is required. Use the equipment as you pay for it. Once you pay off the loan the lender releases their lien, and you own the equipment outright.
If you have good credit, it may be possible to secure a business credit card with a high limit to fund your organization without providing collateral. The application process is usually online, fast, streamlined and does away with the need for piles of paperwork. Business credit cards are great for building a good credit history if you pay off the balance every month. You may even get free travel and shopping rewards with the points you accrue.
Getting a small business loan without providing collateral depends on a number of factors:
As well as satisfying the above requirements, lenders may still ask for a personal guarantee or a file a UCC lien. They will also typically charge higher interest rates on unsecured loans to offset increased risk.
Always shop around for different loan offers before settling on a deal. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of unsecured loans from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for business owners who have never taken out an unsecured business loan before.
What you’ll need:
Depending on the type of unsecured loan you are applying for, lenders may ask for bank statements (at least 18 months), balance sheet, profit and loss statements, cashflow projections, list of debts, list of assets, customer database, documents that reveal the structure of your business (corporation, LLC, etc.), certificates of good standing, tax statements, etc.
Possibly, but it will probably be tough to get approved. You may also need to provide a personal guarantee or a UCC lien. Loans that use the items being financed as collateral – such as your invoices – may be an easier way to go.
No matter if you’re seeking your first no-collateral business loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for your funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality unsecured business loans from a choice of lenders. Give your organization the financial boost it deserves without signing over your key assets. Register with Swoop today.
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.
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