1. Be aware of your options
2. Examine Your Business's 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

4 Steps to Getting a Small Business Loan Without Collateral

The loan is available, but loan terms and requirements for approval 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 phase of your expansion 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 have to provide collateral to the table.

Collateral serves as an insurance policy to the loaner in case that you are in default on the loan and are unable to pay it back for any reason. If your company is in deficit on assets that could be pledged as security and you are looking for a non-collateral business loan may be your top priority.

It's easy to locate businesses loans which don't need collateral as a prerequisite to be approved. Prior to applying to one of these loans, it's important to research the loan so you know what to anticipate.
Important Takeaways

It's possible to find unsecured commercial loans by contacting the Small Business Administration and online lenders.
No collateral doesn't mean that you don't have to accept some form of personal financial responsibility in relation to business debt.
Peer-to-peer lending is another option to pursue business loans that do not require collateral.
Some lenders might be able to charge higher fees or higher interest rates for business loans.

1. Know Your Options for No-Collateral Business loans

The first step to get a business loan requiring no collateral is to understand what alternatives are available. No-collateral loans are offered by several lenders, however loan terms and approval requirements could be quite different.
SBA 7(a) Loans

The Small Business Administration (SBA) provides loans to small-business owners via its network of partner lenders. There are a variety of SBA loan programs you might look into if you require working capital including one of them, the 7(a) program being one of the most well-known. The SBA 7(a) program does not have to require collateral in loans of up to $25,000, which can be beneficial for those who only want to borrow a lesser amount of money.1

For loans that exceed $350,000 for loans that exceed $350,000, the SBA requires lenders to collateralize loans to the greatest extent possible, as much as the loan amount. If you don't have sufficient business assets to fully guarantee the loan, lenders can make use of the real estate that you own as collateral. Still, not having any collateral isn't an issue or an obstacle to getting a 7(a) loan if you satisfy the other requirements.1
SBA Disaster Loans

Alongside 7(a) loans, the SBA offers disaster relief loans for businesses that experience losses resulting from natural disasters and economic crisis. So, for example, a business that's experienced losses as a result of a government mandate to shut down could be eligible for an economic injury loan.

The amount of the down payment required of an SBA loan can range from 10 to 30%, however it will be contingent on the particular loan and borrower.2

Like 7(a) loans, disaster loans less than $25,000 do not require collateral. If you're borrowing more than the amount of $25,000, collateral is expected, but, again the SBA will not deny you the loan due to the lack of collateral alone.3
Small business loans online and alternative Loans

Online and alternative lenders can provide a variety of loans that do not require collateral to help you meet your business' working-capital requirements. The types of financing that you might be able to obtain without needing to offer collateral upfront are as follows:

Term The loan
Invoice Financing (also known as "accounts payable financing")
Inventory Financing
Merchant Cash Advance
Equipment Financing
Purchase Order Financing
Line of Credit

In these types of financing for small businesses There may be some kind of security requirement, but it isn't cash or any other physical asset you have to offer. For instance, in the case of the financing of invoices, you're borrowing your invoices that are due to be paid to borrow money.

With a cash advance for merchants, you're borrowing against the amount of future receipts from your credit card. If you're using loaning equipment to finance, then the equipment you're buying or leasing acts as collateral for the loan.

Peer-to peer lending is another option for small-business financing that does not require collateral. The peer-to-peer loan platforms link investors to small-business owners in need of loans. Investors pool their funds to fund the loan, and owners repay it 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 Meet the Requirements

Some types of no-collateral small-business finance are more difficult to qualify for than other types. For an SBA 7(a) loan, for instance, you must be able to show at least two years of operating experience to your credit, meet the SBA's definition of a qualified small-business and possess at least the required credit rating and revenues SBA lenders require. The SBA also requires that you have exhausted all other borrowing options before applying for a 7(a) loan.4

For alternative and online lenders However, with alternative lenders the requirements could be more fluid. For instance, a lower credit score isn't an obstacle to obtaining the merchant cash advance or invoice financing. In fact, it is possible to secure the initial loans from online or alternative lenders that require only six months of operational history.

The next step to get 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:

Checking your personal and business credit scores
Updating your balance sheet
Creating key financial documents, like the profit and loss statement as well as a cash flow statement
Checking your business expenses and overall cash flow

The aim is twofold: to determine your creditworthiness for the loan and to assess the ability of you to pay it back. Inability to pay back a loan could damage your credit score which makes 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 in determining the amount of borrowing. Based on the terms of the loan and how quickly it's repaid in terms of time, the factor rate could easily translate to an inverse or three-digit effective APR.
3. Make sure you are prepared for a personal Warranty or UCC Lien in lieu

Although you might be qualified for a modest business loan without the need to provide collateral, it doesn't mean the lender won't request additional conditions. Specifically, you may be required to make a personal guarantee or sign a Uniform Commercial Code (UCC) lien.

Personal guarantees are exactly what it looks like: an agreement that you'll personally repay the debt contracted by your business. Personal guarantees are usually an essential requirement for non-collateral loans and small-business credit cards. Because the lender does not have collateral to attach if you don't pay, the guarantee gives it leeway to sue you personally to collect an unpaid debt.

The Uniform Commercial Code lien may be a little different. It is basically a blanket lien that allows the lender to take possession of any or all of your business assets in the event you fail to pay the loan. So even though you didn't provide any collateral to the table to get the loan and the UCC lien could give the lender the option for attaching assets if you don't pay.5
4. Be sure to read the terms carefully before Signing

If you've submitted an application for a small-business loan without collateral and been approved, the final step is to be aware of the loan terms and conditions. When reading your loan contract, be sure to pay close attention at the rate of interest, the annual percentage rate (APR) as well as the repayment schedule, as well as the loan duration.

You need to be aware of the time it will take you to pay the loan off and what your overall cost is to once the costs and interest are factored in.

Speaking of fees, check for the fees you're being charged. For instance, it could comprise a loan origination fee or prepayment penalty. When your financial situation permits for you to repay the loan earlier, you do not need to pay a penalty to do it.

Finally, consider whether personal guarantees or a UCC loan is necessary in the loan agreement. Although you might have the best of intentions to pay back the loan but it's crucial to be aware of how these obligations could affect your company if you're unable to hold up your end of the bargain regardless of the reason.
How difficult is it to obtain a Small Business Loan?

It can be difficult to get a small business loan without a high personal credit score and evidence of stable revenues from your company. In the absence of these requirements, the risk of granting the loan is extremely high for a lender. Depending on a variety of factors, loan offers may require collateral or higher interest rates if the bank considers the applicant's credit profile less than solid. The requirements can strain a business. If you feel the credit rating of your company's profits aren't enough to warrant financing, perhaps getting financing by other means, such as cash from family and friends or crowdsourcing could be a better choice.
Do SBA Loans Require a Down amount?

Absolutely, SBA loans are required to make the payment of a down. The amount of the down payment can vary according to the particular loan and borrower, however the typical down payment is 10%. This amount can range and up to 30% in certain cases.2
Are you able to use SBA Loans for Personal Use?

SBA loans cannot be permitted for personal use. The money are only available for your business. This means financing the business's expenses and expanding your business and salaries, such as your own. SBA loans are not able to be used to pay down your personal debt like your mortgage or credit card debts.
The Bottom Line

Finding the loan for your company can be challenging, especially when you have to put collateral at risk and increase the chance of being a victim. It is the Small Business Administration (SBA) is a great resource for business owners . It can provide financing without collateral.

In addition to the SBA companies can also obtain loans with no collateral however it's important to understand the terms prior to entering into the loan contract. The loans without collateral could have additional strict conditions or high interest rates. If you are deciding to take out a loan, determine what parameters work best for you and your company.
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