New businesses typically represent a risk for lenders, and therefore collateral could be required. However, if your small business is new, you may not have enough collateral to secure a bank loan. In this case, you would need to explore your options for a small business loan without collateral.
This article will help you review your options.
How Collateral Works
When applying for a small business loan from a traditional lender such as a bank, you need to provide collateral. If you should default on the loan, the bank can seize your collateral, sell it, and use the proceeds to cover what is owed. This is called a secured loan.
Collateral can be a tangible asset such as real estate, or an intangible asset such as your accounts receivable. Collateral strengthens your position when applying for a loan, lowers the risk for the lender, and puts you in a position to negotiate more favorable terms.
On the other hand, unsecured business loans do not require you to provide collateral, and approval is based solely on your creditworthiness. An unsecured loan may be a better option for you, but for the lender, it is riskier, and therefore harder to get approved. Due to this reason, the interest rates will be higher compared to secured loans.
Options for Getting a Small Business Loan Without Collateral
Fortunately, there are several options available when it comes to getting a small business loan without collateral.
A Personal Guarantee
A personal guarantee on your small business loan means that you, personally, are responsible for the debt. There are two kinds of personal guarantee: unlimited and limited.
- If you secure your business loan with an unlimited personal guarantee, and your business defaults on the loan, the lender can petition the court for a judgment against any of your personal assets. Your vehicle, home, personal bank accounts, investment portfolio, and other assets can be seized to cover the balance due.
- With a limited personal guarantee, the lender establishes a cap for the total debt you will owe should your business default on the loan. Rather than being able to seize everything you own, the lender agrees on partial recoupment.
A Blanket UCC Lien
Another way to get a small business loan without collateral is with a blanket UCC lien. Unlike collateral, where specific assets are included in the loan agreement, with a blanket UCC lien, the lender can pursue all your business assets should you default on the loan. If you have borrowed a large amount for your business, and owe most of it, the lender might make the effort to go to court.
The primary problem for you with a blanket UCC lien is that it is filed in public records, and it becomes a part of your business credit report. Should you want to secure other kinds of financing, the existence of a blanket UCC lien could work against you. Other lenders or investors prefer a business that is free of encumbrances.
How Easy Is It to Get a Small Business Loan Without Collateral?
It may not be as easy to get a small business loan without collateral, but it is possible.
- SBA Loans – The 7(a) small loan program is the primary vehicle through which the SBA makes loans. If you borrow up to $25,000, you will not need to put up collateral.
- Online Short-Term Loans – One of the major selling points of the online business loan market is its easy application process. When you need immediate cash to cover gaps in cash flow or pay for emergency expenses, an online short-term loan is a good option.
- Online Long-Term Loans – Similarly to online short-term loans, you can get a long-term business loan without collateral from an online lending platform. These loans are good when you want to expand your business or make a significant investment in real assets.
- MCA – Unlike a loan, a merchant cash advance is based on your credit card sales. If you need cash quickly to take advantage of an immediate business opportunity, an MCA might make sense.
- Business Credit Cards – If you need to pay vendors or contractors who do not accept credit cards and you do not have cash in the bank, taking a cash advance on your small business credit card could be a viable solution.
Conclusion
There are options for getting a small business loan without collateral. If you need a modest amount up to $25,000, the SBA small business loan is probably your best option. For larger investments, online business loan platforms offer a variety of loan packages that do not require collateral and are easy to access, or you could consider giving a personal guarantee or blanket lien, after reviewing the risks.