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1. Be aware of your options

2. Review Your Business Financials

3. A Personal Guarantee, UCC Lien or a

4. Review Before Signing

Small Business Questions about Loans

The Bottom Line

Small Business Small Business

Four Steps to Getting A Small Business Loan With No Collateral

The loan is available, but loan conditions and approval requirements vary widely

By Richard Best

Updated November 30, 2022

Read by Margaret James

If you require an unsecured small-business loan — either to fund the next stage of growth or to help keep your company on the right track in case of an emergency, the first important thing to think about is whether you’ll have to bring collateral on the table.

Collateral serves as an insurance policy against the lending institution in the case that you fail to repay the loan and cannot repay it due to any reason. If your company is in deficit on assets that could be secured by a pledge, finding a no-collateral business loan may be your top priority.

It’s easy to get business loans that do not need collateral as a prerequisite to be approved. Before applying in for any of the loans, it’s important to do your research so you know what to be expecting.

Important Takeaways

You can find uninsured commercial loans by contacting the Small Business Administration and online lenders.

However, this doesn’t mean you don’t have to take on some degree of financial responsibility on your own for business loans.

Peer-to peer lending is another option to pursue business loans with no collateral requirements.

Some lenders may be able to charge higher fees or higher interest rates for non-collateral business loans.

1. Know Your Options for No-Collateral Business loans

The first step in getting a business loan requiring no collateral is to know which alternatives are available. No-collateral loans are provided by several lenders, but loan conditions and requirements for approval could be quite different.

SBA 7(a) Loans

It is the Small Business Administration (SBA) provides loans to small-business owners via its network of lender partners. There are many SBA loan programs to consider when you need working capital and the 7(a) program being among the most well-known. The SBA 7(a) programme doesn’t have to require collateral in loans up to $25,000, which is great when you need to borrow a smaller amount of money.1

For loans that exceed $350,000, the SBA requires lenders to collateralize loans to the maximum extent feasible, which is in excess of an amount equal to the loan amount. If you don’t possess enough business assets to fully secure the loan, lenders can utilize the personal property you own as collateral. But, having no collateral whatsoever isn’t a barrier to getting an 7(a) loan if you have the other requirements.1

SBA Disaster Loans

Alongside 7(a) loans, the SBA offers disaster relief loans for businesses that experience losses associated with natural disasters, as well as economic crisis. For example, a business that’s experienced losses as a result of a government directive to shut down might request an economic damage loan.

The amount of the down payment required of an SBA loan can range from 10 percent and 30 percent, but will vary based on the particular loan and borrower.2

Similar to 7(a) loans, disaster loans under $25,000 don’t require collateral. If you’re borrowing more than that amount, collateral is required, however, as with 7(a) loans, the SBA will not refuse you the loan due to the lack of collateral alone.3

Online and Alternative Small Business Loans

Alternative and online lenders may provide a range of loans without collateral requirements to achieve your business’ working capital requirements. The types of financing that you could be eligible for without needing to offer collateral upfront are:

Term Loan

Invoice Financing (also known as «accounts receivable financing»)

Inventory Financing

Merchant Cash Advance

Equipment Financing

Purchase Order Financing

Line of Credit

In these types of small-business financing, 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 leveraging your outstanding invoices to get money.

With a cash advance for merchants it is borrowing against the amount of future credit card receipts. And in the case of loaning equipment to finance, then the piece of equipment you lease or purchase is used as collateral in the loan.

Peer-to-peer lending is a different alternative for financing small businesses that doesn’t require collateral. Peer-to-peer lending platforms connect investors to entrepreneurs who require loans. Investors pool funds to pay for the loan, and owners pay back in the same way as any other loan and with interest. These loans are secured, which means they don’t require collateral.

2. Review Your Business Financials to Determine Whether You Qualify

Certain types of no-collateral small-business financing are more difficult to get than others. If you’re applying for an SBA 7(a) loan, for instance, you must be able to show at least two years of operational history in your resume, be in compliance with the SBA’s definition of a small business that is eligible and possess at least the required credit rating and revenues SBA lenders require. The SBA also insists that you explore all other borrowing options first prior to applying for the 7(a) loan.4

When it comes to alternative and online lenders, on the other hand, the requirements may be more flexible. For example, a lower credit score isn’t an obstacle in obtaining a merchant cash advance or invoicing financing. In fact, it is possible to secure startup loans from online or alternative lenders that require only six months of operating experience.

The next step to obtain a business loan that does not require collateral is evaluating your business and its financial health. This means that you must do things such as:

Examining your personal and business credit scores

Updating your balance sheet

The creation of key financial documents, for instance an income and loss statement as well as the cash flow statement

Examining your business’s costs and cash flow overall

The purpose is twofold: to determine your creditworthiness to get the loan and also to determine your capacity to pay it back. Failing to repay a loan could damage your credit score, making it more difficult to secure any loan in the future.

Some loans with no collateral such as a cash advance for merchants or invoice financing—use a factor rate rather than an interest rate to determine the cost of borrowing. Based on the terms of financing and the time it takes to repay the factor rate could easily translate into an inverse or three-digit effective APR.

3. Be Prepared for a Personal Guarantee or UCC Lien instead

While you may be able to get a small business loan without having to offer collateral, it doesn’t mean the lender won’t ask for other conditions. In particular, you could be asked to provide a personal guarantee, or consent to a Uniform Commercial Code (UCC) lien.

A personal guarantee is just what it sounds like it’s an agreement to personally repay the debt contracted by your business. Personal guarantees are typically an essential requirement for non-collateral loans and credit cards for small businesses. Because the lender does not have collateral that it can attach to when you fail to pay the loan, it has the right to sue you to collect an unpaid debt.

An Uniform Commercial Code lien is a little different. It’s essentially an umbrella lien that permits a lender to attach any or all of your company’s properties in case that you default on a loan. So even though you didn’t put any collateral on the table to get the loan and the UCC lien could give the lender a backdoor option to attach assets in the event that you fail to pay.5

4. Take note of the terms and conditions carefully prior to signing

If you’ve applied for a small-business loan without collateral and have been approved, the last step is to be aware of the loan conditions and terms. When reading the loan contract, be sure to pay close attention to the interest rate, annual percentage rate (APR) as well as the repayment schedule, and the loan period.

You need to know the length of time it will take to pay off the loan off, and also what the total cost of borrowing will amount to when fees and interest are included.

In terms of fees, you should check to find out what fees you’re being charged. It could include an loan origination charge or a prepayment penalty. In the event that your current cashflow allows that you pay back the loan in a timely manner, you shouldn’t have to incur an extra fee to do so.

Finally, consider whether personal guarantees or a UCC loan is necessary as part of the agreement to borrow. While you may be in the best of moods to pay back the loan, it’s important to be aware of how these obligations could affect your company if you’re not able to fulfill your word for any reason.

Is It Hard to Get a Small Business A Loan?

It can be difficult to obtain a small-business loan without a high personal credit score as well as proof of steady income from your company. If you don’t have these documents, the risk of making an loan is high for lenders. In the event of a wide range of factors, loan offers may require collateral or high rates of interest if the bank considers the applicant’s credit profile less than solid. This can be a problem for a business. If you feel you have a poor credit history or your company’s revenues are not sufficient enough to warrant financing, perhaps getting financing by other means like the money of family and friends or crowdsourcing could be a better choice.

Do SBA loans require a down payment?

It is true that SBA loans will require an initial down payment. The amount of the down payment can vary according to the particular loan and borrower, however the typical down payment of 10%. This amount can range and even reach 30% in certain cases.2

Are you able to use SBA loans for personal use?

SBA loans are not allowed to be used for personal purposes. The money are only available for your business. This includes the cost of expenses for your business and expanding your business and even salaries, including your own. SBA loans can’t be used to pay down your personal debt like your mortgage or credit card balances.

The Bottom Line

Obtaining a loan for your company can be difficult, particularly if you need to place collateral at risk and increase the chance of being a victim. There is a Small Business Administration (SBA) is a great source for entrepreneurs that offers financing options without the need for collateral.

Outside of the SBA companies can also obtain loans with no collateral but it’s crucial to be aware of the terms prior to making a decision to sign the agreement. These loans may come with different strict terms or higher interest rates. When deciding on a loan consider the parameters that work best for you and your company.