How to Get a Small Business Loan Without Collateral

If you are looking for a loan to help fund your small business or keep it afloat during an unplanned crisis, consider whether you will be required to provide collateral.

If you default on your loan, collateral is a security for the lender. Finding a business loan without collateral may be the best option for your company if you don’t have any assets to pledge as security.

You can find business loans without collateral. Do your research before applying for these loans so that you are aware of what to expect.

SBA 7(a), Loans

Through its partner lender, the Small Business Administration (SBA) guarantees loans to small business owners. The 7(a), the most popular, is one of several SBA loans you can consider if you require working capital. SBA 7(a), which offers loans up to $25,000 without collateral, is an excellent option if you need a small amount. 1

SBA requires that lenders collateralize all loans exceeding $350,000 to the extent possible. Lenders can use your personal property as collateral if you need more business assets to secure the loan. If you don’t have any collateral, it won’t stop you from getting a 7(a).

SBA Disaster Loans

SBA also offers disaster relief loans to businesses that suffer losses due to natural disasters or economic crises. For example, a company that has suffered losses because of a government order to close down can apply for an economic damage loan.

Disaster loans below $25,000 do not require collateral. If you borrow more than $25,000, collateral will be required. However, the SBA will only accept a disaster loan if you have collateral.

Online Small Business Loans and Alternatives

Alternative and online lenders offer loans that do not require collateral to meet the working capital needs of your business. You can get financing without having to put up collateral.

Invoice Finance

Inventory Financing

Merchant Cash Advance

Equipment Financing

Purchase Order Financing

These types of small business financing may require some form of security, not cash or other physical assets. With invoice financing, for example, you can borrow money by using your outstanding invoices.

You borrow against future credit card receipts with merchant cash advances. In the case of equipment finance, the equipment you are buying or leasing is used as collateral.

Peer-to-peer lending offers another alternative for small business financing without collateral. Platforms for peer-to-peer loans connect investors to small business owners needing loans. Investors pool their money to fund the loan, and the owner pays it back with interest, just like any other loan. These loans do not require collateral.

Examine your business financials to determine if you qualify

Applicants for some types of small-business loans without collateral may have a more challenging time qualifying than others. For example, to be eligible for an SBA 7(a), you need at least two years of experience in business. You also must meet SBA criteria for a small business and have a minimum credit score. You must exhaust all other lending options before applying for an SBA 7(a).

Online and alternative lenders may have more flexible requirements. For instance, a low credit score might not be a barrier to getting invoice financing or a merchant cash advance. It may be easier to obtain startup loans if your business has only been in operation for six months.

You must evaluate your business’s financial situation to get a loan without collateral. This means you should do things like:

Checking credit scores for personal and business use.

Update your Balance Sheet.

Create critical financial documents such as a Profit and Loss Statement or a Cash Flow Statement.

Cash flow analysis of your business: Reviewing expenses and cash flow.

It is used to both determine your creditworthiness and assess your repayment ability. Failure to repay debt can negatively impact your credit score and make it harder to get any financing in the future.

A factor rate calculates the cost of borrowing for some types of loans without collateral, such as merchant cash advances or invoice financing. The factor rate is easily converted to a two or three-digit APR depending on the loan terms and the speed at which it’s paid back.

Be prepared for a UCC or Personal Guarantee

You may be asked to sign a data-component=”link” data-ordinal=”2″ data-source=”inlineLink” and agree to liens under the Uniform Commercial Code (UCC). You may be required to sign a Personal Guarantee or accept a Uniform Commercial Code lien.

Personal guarantees are an agreement to repay any debts taken on by the business personally. Personal guarantees are required for small business credit cards and no-collateral loans. The lender can only attach collateral if you pay. A personal guarantee allows it to sue you to recover an unpaid debt.

The Uniform Commercial Code lien is slightly different. A Uniform Commercial Code lien is additional. It allows the lender to attach all or part of your assets if you default on a business loan. Even though you did not put up any collateral to secure the loan, the UCC lien allows the lender to attach assets if you default.

Please read the terms carefully before signing

When reviewing the loan agreement, pay attention to the interest rate, a data-component=” link,” data-ordinal=”1,” data source=” inline link,” and the loan term. When reviewing the loan agreement, consider the annual percentage rate, the loan term, the interest rate, and the payment schedule.

It is essential to calculate the total cost of borrowing, including interest and fees.

Check to see what fees are being charged. You might be charged a loan origination fee or a prepayment penalty. You don’t need to pay any penalties if you can pay the loan off early.

Consider whether you must provide a personal guarantee or if a UCC lien is part of the agreement. You may be well-intentioned in your efforts to repay the loan. However, it would be best if you considered how this could affect your business.

Bottom Line

It can be challenging to get a business loan, especially if you have to provide collateral, which increases your risk. Small Business Administration offers financing options for small business owners without requiring collateral.

Businesses can also get loans without collateral outside of the SBA. However, it is essential to read the contract terms before signing. The terms of loans without collateral can be strict or have high-interest rates. Determine the parameters best for your business and yourself when deciding which loan to take.

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