Finding the right loan can be a confusing process. Small-business owners are looking to make a profit and lenders hoping to get their money back plus interest and other fees. One reason collateral exists is to reassure lenders that even if borrowers can’t repay the loan, lenders will still get a return.
What if you don’t have assets to offer as business collateral or you simply don’t want to worry about it? Other options are out there. With a little research, you can find the right fit for your business to help you reach your goals.
What is collateral?
Collateral is an asset accepted by a lender as loan security. If the borrower defaults on payments, the lender can seize the collateral and resell it to recoup losses.
Any business asset that has value and can be sold by the lender to pay off the loan if necessary can be considered collateral. Examples of collateral include:
- Accounts receivables
Unable to provide collateral for a business loan application? There are business loans out there that don’t require collateral but approval may be more difficult than others.
For a loan without collateral, some lenders will require some type of guarantee. These guarantees include:
- A personal guarantee – A personal guarantee makes the business owner responsible for paying back the debt. Since the loan is unsecured, a personal guarantee is not tied to a specific asset.
- A blanket lien on business assets – This type of lien gives the lender the right to seize all types of assets owned by a debtor in the event of nonpayment. A blanket lien, theoretically, gives a creditor a legal interest in all of the debtor's assets.
If you’re interested in a business loan without collateral, follow these 5 steps.
1. Clean up your credit
When seeking business funding, it’s important to identify and fix any problems or discrepancies on your credit reports. The Fair Credit Reporting Act allows you to get one free credit report every year from each of the three major credit reporting bureaus - Equifax, Experian, and TransUnion. If you get reports from all three at separate times, you’ll be able to pull a free credit report once every four months to identify issues or problems that need to be dealt with in a timely manner.
In addition to checking for accuracy, strive for a high score. Lenders associate high credit scores with less risk so you’ll get much better rates and terms if you have strong scores. There are several guidelines to follow to keep your scores in check.
- Keep balances low on credit cards and other revolving credit.
- Pay off debt rather than moving it around.
- Don't close unused credit cards as a short-term strategy to raise your scores.
- Don't open a number of unneeded new credit cards
Since good credit is such an important element when applying for a low-cost business loan, the SmartBiz® Small Business Blog has covered this topic extensively. Read these detailed articles to learn more about how to establish credit, how business and personal credit scores are calculated, how lenders view credit scores, and how to improve yours:
- Personal Credit Scores: Important When Seeking a Small Business Loan
- FICO SBSS: What’s Your Business Credit Score?
2. Create a solid business plan
Many lenders will review your business plan before agreeing to fund a loan. Your business plan should show lenders a good reason they want to offer you a low-cost loan.
Other reasons for creating a business plan include defining new business, outlining an agreement between partners, setting a value if selling your business, and to help you manage and track business planning. On top of all of the reasons to have a business plan in place, the process of writing your plan can be a big help. You’ll see where you’ve been and have a plan for where you’re headed.
If you don’t have a business plan, use our handy guide from the SmartBiz Loans® Resource Center to help you get started: Ultimate Guide: How to Start a Business Plan.
3. Research lenders
Don’t start a loan application process without researching lenders. They all differ in types of financing, qualifications needed, fees, credit requirements, and more. Your goal should be to find a lender offering the lowest cost funds with the longest terms. Small business loans with long terms typically have very low monthly payments. Low monthly payments help you budget and keep a handle on your business cash flow.
When researching, don’t forget to check out the customer service available. Is there an easy way to reach the lender via phone or online chat? Read online reviews from real customers to see what they say about the service and resources available to help.
4. Determine your cash flow projections
Closely linked to your credit score, it’s important to keep a close eye on your cash flow projections in order to ensure that you’re able to pay off a loan. Fixing your credit score should be your main priority, otherwise you’ll end up with a high interest rate and be unable to repay the loan if you don’t have sufficient cash flow.
5. Apply for an unsecured business loan
Your business may qualify for a business loan without collateral if you meet the following criteria. Check with your lender for specifics and be sure to pay attention to rates and terms.
- Healthy cash flow and ability to make timely payments
- Positive business projections
- Financial records of consistent profits
- Excellent credit scores
Best options for business loans without collateral
1. Small Business Administration loans (SBA loans)
SBA loans do not require collateral but a lien on business assets is required for an SBA loan from a bank in the SmartBiz network. However, there is no minimum requirement for the value of those assets.
SBA loans are known as the “gold standard” in small business loans because of low rates, long terms, and very low monthly payments. Funds from an SBA loan can be used for many business building initiatives like equipment purchases, marketing, hiring, and inventory. You can also save big with an SBA loan for debt refinance. SmartBiz Loans® has streamlined the SBA loan application process and funds can be available as soon as 7 days after you complete the required paperwork. Start an SBA 7(a) loan application here.
2. Merchant Cash Advances (MCAs)
An MCA provides a quick solution for those in need of short-term financial assistance and for business owners who’ve been denied a traditional loan from their local bank. They require very little paperwork, no collateral, and can be approved and funded within a day or two, even for business owners with a low credit rating.
Unfortunately, the convenience of cash advance loans comes with a catch—mostly in the form of exorbitant interest rates and hefty fees. If you’re considering applying for one, make sure you fully understand the downsides of merchant cash advances. Read this post from the SmartBiz Small Business Blog for additional information: What Your Business Needs to Know About Merchant Cash Advances.
3. Business credit cards
Small business credit cards give business owners access to a revolving line of credit. They have a set credit limit and allow you to make purchases and withdraw cash. Like a consumer credit card, a small business credit card carries an interest charge if the balance is not repaid in full each billing cycle. You can get approved for a credit card through a bank or you can compare cards terms and features and apply online. Read Six Benefits of Using a Business Credit Card for more information.
Getting a small business loan without collateral may seem challenging, but it's doable. However, there are ways around collateral requirements. Improve credit scores, research to find the best rates, and choose a lender that believes in your small business, right from the start.