How To Get A Small Business Loan Without Collateral
Small business owners that don’t have collateral or aren’t willing to risk losing their valuable assets can benefit from small business loans without collateral or what we call—unsecured business loans.
The funding options for small business owners are diverse. So, if you are wondering whether you can avail a small business loan without collateral, the answer is yes.
You can secure a small business loan if you meet the lender’s eligibility criteria.
Read on to be informed about the business loan options without collateral that would be ideal for your business.
I) Types of small business loans without collateral
1) SBA 7(a) Loans under $25,000
With this type of loan, you can borrow up to $25,000 without collateral. Compared to other business loans, the SBA 7(a) loans have a longer repayment time frame of 10 to 25 years. Only industries such as manufacturing companies, hotels, e-commerce businesses, retail stores, and other eligible industries can secure an SBA loan.
The minimum FICO SBSS score is 140, but some lenders may require a score of 160 and above. The higher the FICO SBSS (Small Business Scoring System) score, the better your chances of getting approved for an SBA loan. Some lenders prefer borrowers with a personal credit score of 640 and above.
2) SBA Disaster Loans
From the name, we can tell what this loan is for. Business owners can use this loan to sort out any financial or inventory loss due to natural disasters. With this type of loan, you can get up to $25,000 without collateral, and the repayment period will start 12 months after you receive the loan.
3) Equipment Financing
Equipment financing comes in these two forms—equipment loans and equipment leasing. With equipment financing, you can secure a loan from a lender to buy the equipment you need or lease the equipment directly from an equipment vendor.
Since equipment financing falls under the category of an unsecured loan, lenders will want to reduce the risk they carry by having legal rights to claim your equipment if you default on the loan.
Usually, the repayment term can go from 6 months to 10 years. Equipment financing has lesser requirements compared to traditional bank loans. It is ideal for small business owners with bad credit, and the application process is usually faster.
4) Merchant Cash Advance
With this type of loan, you get access to cash quickly. You can use the funds to cover short-term business expenses and cash flow shortages.
If your application is approved, the lender will give you a lump sum. As you repay daily or weekly, the lender will deduct up to 10% to 20% of your credit or debit card sales with additional fees until it covers the total amount you borrowed. Repayment can also be fixed and calculated according to the estimate of your monthly income. The fixed-rate repayment plan will remain the same even if you don’t make enough profit daily or weekly.
If you sell products or services through credit or debit card payments, a merchant cash advance can be a great funding option for your company. Your potential to repay the borrowed amount depends on future sales you make. The repayment period for a merchant cash advance can last from 3 to 18 months.
5) Inventory Financing
Inventory financing is a short-term loan (it can also be a revolving line of credit) that you can obtain to buy inventory to sell for profit.
With this type of financing, lenders will lend you up to a certain percentage of your inventory's value. They will consider the liquidation value of your inventory before approving you for a loan. You should expect a higher interest rate with this type of loan due to the likelihood that the inventory can decline in value after a while.
6) Unsecured Business Line of Credit
With a business line of credit, you can access cash anytime. A business line of credit is a revolving line of credit that lets you borrow up to your credit limit.
If you spend up to your credit limit, you can repay it to renew the credit line up to the credit limit the creditor has approved. Any amount you withdraw, you'll need to repay with interest. The repayment period can range from 12 weeks to 5 years.
7) Invoice factoring
With this short-term loan, you sell your invoices to a factoring company. You can convert up to 70% to 90% of unpaid invoices to cash. If you send invoices to clients to receive payment for products sold or services rendered, you can apply for invoice factoring.
Rather than lenders considering your credit in invoice factoring, they will evaluate your customers' or clients' creditworthiness and check if they have a good history of paying their invoices. If the client appears creditworthy, the lender can let you borrow up to 70 to 90% of the amount they owe you.
You will need to entrust your unpaid invoices to the invoice factoring company. When your customers send the invoice payment to the invoice factoring company, they retrieve the amount loaned to you plus their interest and fees. The invoice factoring company will pay you the remaining amount after they deduct the necessary charges.
8) Invoice Financing
Invoice financing operates similarly to invoice factoring. With invoice financing, you're in control of your invoice, while you entrust your invoice to the factoring company in invoice factoring. Invoice financing enables retailers and wholesalers to borrow money against unpaid invoices of customers.
If you are creditworthy, lenders will pay you up to 90% of your customer's unpaid invoice. When the customer sends you the invoice payment, you pay the lender the amount loaned plus the agreed-upon interest rate and fees charged by the lender.
You keep the remaining balance after the deduction of the necessary charges. Invoice financing and invoice factoring are great loan options for B2B companies due to how expensive the rates could get after a while.
9) Crowdfunding
Crowdfunding is a way to capture the attention of prospective investors or audiences willing to fund a particular business goal.
You can go this route by visiting several crowdfunding websites. Craft a pitch to sell your campaign idea to the crowd persuasively. Those interested can send contributions.
Promote your campaign across several social media platforms to reach a wider audience of interested lenders, customers, funders, or investors.
There are four types of crowdfunding for small businesses. Here they are—rewards-based, equity-based, debt-based, and donation-based.
- The rewards-based crowdfunding occurs when those that funded your business goal or idea expect a non-financial reward, such as a discount on your product or a free product.
- Equity-based crowdfunding enables investors to invest in your business in return for a portion of your business equity.
- With debt-based crowdfunding or peer-to-peer (P2P) lending, interested individuals can fund your business directly without the middleman (banks or other traditional financial institutions), and you need to repay the funds with interest at a specific date.
- Donation-based crowdfunding is a way that people can support your business financially without expecting any compensation in return.
10) Unsecured Personal loans
You can obtain a personal loan to fund your business needs. Although, some lenders restrict the use of personal loans to fund a business need. Inquire if you can use a personal loan to support your business goals.
Read through the necessary conditions of the loan to know if there are any limitations. As usual, expect higher rates with unsecured personal loans. The interest rate will also vary depending on your credit score or creditworthiness.
II) Advantages of a small business loan without collateral
No collateral
Business loans without collateral can be very beneficial for small business owners that don't have collateral or those who can't risk putting up their assets as collateral.
Low upfront cost
Unsecured business loans usually come with lower upfront costs compared to secured loans. A secured loan will require a lender to value your assets, which can lead you to pay a higher upfront cost.
With an unsecured business loan, there is no collateral to assess, so you only need to pay a low upfront cost.
Wide range of loan options
There are unsecured business loan options that can be ideal for your business. You can opt for an SBA 7(a) loan, P2P lending, invoice factoring, merchant cash advance, or other loan options.
Faster loan approval
The lender won't need to spend time assessing the value of any collateral, thereby hastening the loan application process.
Tax-deductible interest benefits
With business loans, you can deduct the interest on the loan, which can help you save money.
Easier application process
You can apply for most unsecured business loans online.
III) Disadvantages of a small business loan without collateral
Expect higher interest rates
Lenders will compensate with a high-interest rate to mitigate the risk of an unsecured loan. Also, realize that if you don't have a good credit score, you'll likely have to repay the loan with a high-interest rate since you won't appear creditworthy to most lenders.
Less favorable terms (shorter terms)
An unsecured loan is not protected, so lenders will set a short-term loan to encourage borrowers to repay the loan as soon as possible.
Need a personal guarantee
A personal guarantee will enable the lender to seize your assets if your company defaults on the loan.
May not qualify for a large loan
If you plan to secure a large amount of money without collateral, lenders are less likely to approve your application for the loan.
It can be hard to qualify
The criteria to obtain an unsecured business loan may be difficult for some small businesses to meet. Some lenders will likely require a high credit score, personal guarantee, and other requirements.
IV) Prepare to sign a personal guarantee
Lenders usually require small businesses to sign a personal guarantee. If a lender grants a business owner an unsecured loan, the lender will bear the risk. A personal guarantee mitigates the risk the lender will carry.
Signing a personal guarantee means you will be responsible for the loan if your company fails to pay the debt. You can inquire from lenders whether you need to sign a personal guarantee. If you are not ready to be liable for the loan, opt for funding options that don't require a personal guarantee.
The SBA 7(a) loans require a personal guarantee. So, if you want to secure one, ensure you can take responsibility for any debts your company may acquire.
V) What to consider before getting an unsecured business loan
Making the right decisions can help you secure an ideal small business loan that suits your company’s needs.
Let's consider these factors:
Eligibility
A good business and personal credit score will move you closer to obtaining a small business loan. SBA 7(a) loans require borrowers to have a credit score of at least 640. Some alternative lenders may require a credit score of at least 620.
The type of loan
Check what type of loan that will be suitable for your business. You can obtain a loan as a lump sum or line of credit. If you need funds to pay for inventory, inventory financing can be an ideal option for your company.
The loan terms
Decide whether a long-term or short-term loan is favorable for your business. Check the lender's interest rate, fees, and their rights to sue you or seize your properties if you default on the loan.
VI) FAQ about small business loans without collateral
What is an SBA loan?
An SBA loan is a small business loan granted by a network of accredited lenders consisting of banks or online lenders. You can use it for several business purposes, such as inventory purchases, business expansions, or construction.
What is an unsecured business loan?
It is a business loan offered by lenders that don't need collateral. A collateral is any valuable asset pledged by a borrower, which gives a lender full rights to seize it if the borrower fails to repay the loan according to the loan agreement.
Do all business loans require a personal guarantee?
Not all, but most lenders will require a personal guarantee for an unsecured business loan. You can inquire from the lender to know if it is needed. The SBA 7(a) loans require you to sign a personal guarantee. Some lenders can also require personal guarantees for secured business loans.
Can I get an unsecured small business loan?
If you meet the lender's requirements, you can obtain one. The eligibility criteria can depend on your credit score, business plan, balance sheet, loan proposal, and other small business loan requirements.
Can I get a business loan from banks without collateral?
Yes, it is possible. You can secure a business loan without collateral from Bank of America, PNC Bank, and Wells Fargo. Usually, unsecured business loans will be harder to qualify for, but if you meet the eligibility criteria, you're good to go.
Final thoughts
Review the lender’s eligibility criteria if you want to apply for a loan. You should also consider the lender’s interest rate and other charges to know if you can afford the loan.
Check out the reviews of the lending company you’d like to borrow from to know if their offer fits your financial situation or your business needs. Only secure a business loan that fits your ideal business goals. Read the loan agreement thoroughly, and consider the actions a lender may take if your company defaults on the loan.
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