As a business owner, there may be times when you need quick cash to put toward expanding your inventory, payroll, or production costs. Funding your business is not always easy, especially if you do not have personal collateral or assets to pledge as security.
The problem is, finding that cash is not always easy. Many traditional lenders, like banks and credit unions, only offer secured loans that require substantial collateral. This collateral can range from personal assets like cash, your home (especially if you have home equity), automobiles, IRA’s and 401(k) ’s to stock and bonds. These same lenders will also look to securitize these loans with blanket liens and UCC’s on your business along with any assets or collateral the company owns.
For example, a mortgage is a secured loan because the lender can take over ownership of the home if payments aren’t made. Likewise, a car loan is a secured loan because the lender can take the car back instead of payments.
When you don’t have collateral to guarantee your loan, you may be wondering if you can obtain an uncollateralized loan. Luckily, some nonbank lenders do offer unsecured business loans. These loans can have strict guidelines since there is no traditional personal guarantee on the loan, but they can be a good option for those who need a business loan.
If you’re wondering where I can get a business loan without collateral, keep reading. We’ll guide you through the process, so you know exactly how to find the right financing option for your business.
Can You Get a Business Loan with No Collateral?
Yes, it is possible to get a business loan without collateral. You may also be wondering; can I get a business loan with bad credit and no collateral? The good news the answer is still, yes.
There are many types of unsecured business loans available, including SBA loans (the SBA 7a loans), term loans, merchant cash advances, and more. Most online lenders will evaluate your credit history, how much money you keep in your business bank account, and loan amount based on the last three months of business bank statements and future cash flow projections. Here’s what you need to know about each type.
One of the most affordable unsecured loans for businesses is a business loan from the Small Business Administration. This government agency offers loans through SBA-approved lenders and institutions.
SBA loans allow you to borrow money for just about any business need, including purchasing inventory and buying real estate. These types of loans have extended payment terms and reasonable interest rates. However, most SBA loans require a strong borrowing history and a high credit score. Unlike the banks, the SBA (which guarantees the loan for the bank) will require a robust personal guarantee on all business owners with 20% or more equity in the business.
Online Term Loans
The creditor will determine your repayment plan for long-term and short-term loans based on a variety of factors such as credit risk, industry, and time in business. In general, short-term loans are usually easier to qualify for but can be more expensive than long-term loans. The advantage is that if you are a sole proprietorship or have bad credit, you can still be eligible for a loan program.
Merchant Cash Advance
A merchant cash advance is not a loan in the same sense as the other options mentioned above. Instead, it is a transaction where businesses get cash in exchange for a percentage of daily credit card or debit card sales.
Merchant cash advances are a fast option that does not require collateral or an excellent credit score. The repayment plan on a merchant cash advance is a bit different than that of a traditional loan. Typically, a lender will advance t company cash in exchange for a percentage of the company’s daily credit card sales. For that reason, businesses that make a large portion of revenue through credit card payments may consider this option as a way to get quick cash.
Unsecured Business Loans
Unsecured loans do not require any traditional collateral. Thus, businesses without valuable assets needed to obtain the conventional secured loan may qualify for an unsecured business loan.
These loans are a more significant risk for the lender, so interest rates are usually higher to compensate. An unsecured business loan will likely come with a shorter repayment schedule and higher APR than a secured business loan.
- No Equity Required: Unsecured loans do not require any equity. As an example, a home mortgage requires a minimum deposit to secure the loan. Generally, you might be required to deposit three to twenty percent to secure the property. With an unsecured business loan, you do not need to put up any cash to secure it.
- No Down Payment: Down payments can be a very limiting factor that prevents businesses from growing. Unsecured business loans are often free of down payment requirements, meaning there is not a significant upfront cost for you to obtain the cash you need. This loan type differs from other financial institutions that want to see you have “skin” in the game.
If you have strong personal credit and are perhaps a newer company without business credit or history, there is a chance you may qualify for a personal loan. The advantage is that you can leverage your credit history. The disadvantage is if the business does not generate adequate revenue or worst the business failed, you are on the hook personally for this loan.
You cannot get this loan with bad credit.
Business Credit Cards
With business credit cards, you can leverage your good personal credit to secure what amounts to as business lines of credit.
Believe it or not even with a brand new business, if you have a strong personal credit history, a FICO score above 680, low credit card utilization and own a home with a mortgage, might be eligible for unsecured business lines of credit from $20,000 to as much as $200K.
Peer to Peer or Crowdfunding Sites
This business finance strategy involves ironing out your elevator pitch for public consumption.
Blanket UCC Lien
Some lenders offer a blanket UCC lien instead of standard collateral.
How to Obtain an Uncollateralized Loan
Are you ready to obtain an uncollateralized loan for your business? Follow these steps to get the cash you need:
1. Evaluate Your Business
Before you start your research for an unsecured business loan, you’ll want to evaluate your business. Think about where your business stands financially, and why you’re in need of money. When will you have funds to pay the money back, and how much can you risk? Determine your financial strengths, so it is easier to identify the right loan when you see it. Here are some questions to help you honestly evaluate your business.
- What is your credit score?
- How much money do you need to borrow?
- How soon can you pay back the loan?
- Do you have money for a down payment?
- Will the cost of fees and interest rates equal less than the profits to be made by borrowing the money? (This cost involves knowing your return on investment or ROI.)
- Do you have any valuable collateral that could be used for a self-secured loan?
2. Improve Your Finances
It’s true that you can get a business loan without any collateral or a good credit score. But the better your financial situation, the lower the risk the lender takes in allowing you to borrow money.
Having strong credit and financials means interest rates will likely be lower, and terms will be more flexible. Do everything you can to improve your company finances before you start researching loans. Here are a few ideas on ways to do it:
- Boost credit score by making payments on time
- Pay off outstanding bills
- Lower debt or combined other obligations
- Avoid applying for new credit cards until you’ve chosen the right loan
- Keep unused credit card accounts open
- Dispute inaccuracies on your credit report
3. Create a Business Plan
Most companies create an in-depth business plan before they launch, but it’s never too late to develop one or add to an existing business plan.
Creating a business plan is a chance to define your business purpose, identify where profits come from, hone a growth strategy, and project cash flow. All of these details will be very important in choosing the right business loan, so it’s a good idea to go over your business plan even if you already have a solid one in place. Some lenders may also require a business plan in the loan application. Here are some other things to include in your business plan:
- Marketing plan
- Uses for funds
- Distribution and logistics
- Cost of running the business
- Potential investments
- Financial history
4. Apply for a Loan
After thorough research, you’ve hopefully found a loan that’s an excellent fit for your business.
Now it’s time to apply for the loan and wait to find out if you qualify. Most alternative lenders will do an initial soft credit pull and decide within 24 hours, sometimes less. Alternative lenders tend to consider other factors such as business revenue and length of time in business.
Here are some of the documents and information you will probably need for your loan application:
After You’ve Obtained a Loan
Once you’ve obtained your uncollateralized loan, be sure to keep up with payments. Making good timely payments will minimize the fees and interest that accumulates over the loan terms. Some lenders will set up automatic payments from your business checking account. If this is the case, always keep plenty of funds in your account to avoid overdraft fees.
Implementing These Tips
After reading this guide to uncollateralized loans, you’ll be well equipped to find the right loan for your business. A business loan will help you grow your business and avoid the stresses that come from operating on a tight budget. Put the money to good use, and your business will flourish.