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4 Steps to Get a Small Business Loan Without Collateral

The loan is available, however loan terms and requirements for approval are not the same.

By Richard Best

Updated November 30, 2022

Reviewed by Margaret James

When you need a small-business loan, whether to finance the next phase of your growth or to help keep your company on the right track in case of an emergency, the first thing to consider is whether you’ll be expected to bring collateral on the table.

Collateral acts as security against the lending institution in the case that you fail to repay the loan and cannot repay it for any reason. If your business is short in assets that can be used as security then obtaining a no-collateral business loan might be your highest priority.

It’s not difficult to locate businesses loans which don’t require collateral as a requirement for approval. Before applying in for any of the loans it’s essential to research the loan so you know what to be expecting.

Key Takeaways

There are unsecured small business loans through the Small Business Administration and online lenders.

However, this doesn’t mean you’re not required to assume some level of personal financial responsibility for business credit.

Peer-to peer lending is another alternative to pursuing business loans that do not require collateral.

The lender might charge higher fees or rates for no-collateral business loans.

1. Know Your Options for No-Collateral Business loans

The first step to get a business loan that doesn’t require collateral is to determine what options are available. Non-collateral loans are provided by various lenders, however loan terms and approval requirements can be very different.

SBA 7(a) Loans

The Small Business Administration (SBA) offers loans to small-business owners via its network of lender partners. There are several SBA loan programs you might look into if you require working capital and that 7(a) program being one of the most popular. It is the SBA 7(a) programme doesn’t have to require collateral in loans that exceed $25,000, which is helpful when you need to borrow a smaller amount of money.1

For loans exceeding $350,000 for loans that exceed $350,000, the SBA requires lenders to secure loans to the greatest extent feasible, which is as much as maximum loan amount. If you don’t possess enough assets for your business to secure the loan the lender can make use of the real estate that you have as collateral. But, having no collateral whatsoever isn’t a barrier to getting an 7(a) loan if you have the other requirements.1

SBA Disaster Loans

In addition to 7(a) loans, the SBA also offers disaster relief loans to businesses who suffer losses associated with natural disasters, as well as economic turmoil. So, for example businesses that have suffered losses due to a federal order to shut down may apply for an economic injury loan.

The down payment to get an SBA loan can be between 10 percent and 30 percent, but 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 this amount, collateral will be required, however, as with 7(a) loans it’s not required. SBA will not deny you an loan because of the absence of collateral alone.3

Small business loans online and alternative Loans

Alternative and online lenders may provide a range of loans that do not require collateral to help you to meet your business’s working capital needs. The kinds of loans you may be able to get without having to provide collateral up front include:

Term Loan

Invoice Financing (also known as “accounts for receivables”)

Inventory Financing

Merchant Cash Advance

Equipment Financing

Purchase Order Financing

Line of Credit

With these types of small-business loans There may be some kind of security requirement however it’s not cash or any other physical asset you have to offer. For instance, in the case of invoice financing, you’re leveraging your outstanding invoices to borrow money.

With a merchant cash advance is a loan against the amount of your future credit card receipts. If you’re using loaning equipment to finance, then the equipment you’re buying or leasing serves as collateral for the loan.

Peer-to-peer lending is another alternative for financing small businesses that doesn’t require collateral. The peer-to-peer loan platforms link investors with small-business owners who need loans. Investors pool their funds to finance the loan and the owners pay back in the same way as any other loan, with interest. These loans are unsecured, meaning that there is no collateral required.

2. Examine Your Financials for Your Business to Determine Whether You Qualify

Some types of no-collateral small-business finance may be more difficult to obtain than others. With one type of SBA 7(a) loan, for example, you need to have at minimum two years of operational history under your belt, meet the SBA’s definition of a small business that is eligible and also have at least the required credit rating and revenue SBA lenders require. The SBA also insists that you explore all other borrowing options first prior to applying for the 7(a) loan.4

When it comes to alternative and online lenders However, with alternative lenders the requirements are more fluid. For example, a lower credit score may not be an obstacle to obtaining a merchant cash advance or invoice financing. It may also be simpler to secure start-up loans through online lenders or other lenders which only require six months of operational history.

The second step in getting a business loan without collateral requirements is to evaluate your company and its financial standing. That means doing things like:

Checking your personal and business credit scores

The balance sheet should be updated

The creation of key financial documents, such as an income and loss statement, as well as a cash flow statement

Checking your business expenses and overall cash flow

The purpose is two-fold: to assess your creditworthiness to get an loan and to assess your capacity to repay it. Failing to repay a loan can affect your credit score which makes it more difficult to get any kind of credit in the near future.

Certain types of loans that don’t require collateral, such as a merchant cash advance or invoice financing–use a factor rate rather than an interest rate in determining the cost of borrowing. Based on the terms of financing and how quickly it’s repaid the factor rate could easily translate to an inverse or three-digit effective APR.

3. Be prepared for a Personal Warranty or UCC Lien instead

While you may be able to get a small business loan without needing to provide collateral, it doesn’t mean the lender won’t request additional conditions. Specifically, you may be required to sign a personal guarantee or sign an Uniform Commercial Code (UCC) lien.

Personal guarantees are just what it sounds like it’s an agreement to personally pay back the debt you’ve that your company has taken on. Personal guarantees are usually required for no-collateral loans as well as small-business credit cards. As the lender has no collateral to attach if you don’t pay the loan, it has the right to sue you in order to collect a unpaid debt.

The Uniform Commercial Code (CC) lien can be different. It’s essentially an umbrella lien that permits the lender to take over all or any of your business assets in the event you are in default on the loan. Even if you didn’t provide any collateral to the table in order to obtain the loan, a UCC lien would give the lender an option of attaching assets in case you don’t pay.5

4. Take note of the terms and conditions carefully prior to signing

If you’ve submitted an application to a business loan without collateral and have been granted approval, the next step is understanding the loan terms and conditions. While reviewing the loan contract, be sure to pay attention to the interest rate, the annual percent 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 to pay off the loan off and what your amount of debt will amount to when fees and interest are included.

In terms of fees, you should check for the fees you’re being charged. It could include an loan origination fee or a prepayment penalty. If your cash flow permits you to pay off the loan in a timely manner, you shouldn’t want to pay penalties to make it happen.

Consider whether personal guarantees or a UCC lien is required as part of your borrowing agreement. Although you might be in the best of moods to pay back the loan however, you must be aware of how these obligations could affect your company if you’re not able to fulfill your end of the bargain in any way.

How difficult is it to obtain a Small Business Loan?

It isn’t easy to get a small business loan without a high personal credit score as well as proof of regular income from your business. If you don’t have these documents, the likelihood of making an loan is extremely high for lenders. Based on a range of aspects, loan offers may require collateral or higher rates of interest if a bank finds the profile of an applicant to be poor. This can be a problem for a business. If you believe that you have a poor credit history or your your business’s profits aren’t enough, then perhaps obtaining financing by other means, such as the money of family and friends or crowdsourcing, could be a better choice.

Do SBA loans require a down amount?

Absolutely, SBA loans will require the payment of a down. The down payment will vary according to the particular loan and borrower; however the typical down payment is 10%. The amount may vary, and can even reach 30% in certain cases.2

Can You Make Use of SBA Loans for Personal Use?

SBA loans are not permitted for personal use. The funds can only be used to fund your business. This includes paying for the business’s expenses as well as expanding your business and also salaries, like your own. SBA loans can’t be used to settle your personal debts, such as your mortgage or personal credit card balances.

The Bottom Line

The process of obtaining the loan for your business could be a challenge, especially if you are required to put collateral at risk and increase the risk for you. The Small Business Administration (SBA) is a fantastic resource for business owners . It can provide financing without the need for collateral.

Other than the SBA Businesses are able to obtain loans that don’t require collateral though it’s important to understand the terms before making a decision to sign the agreement. The loans without collateral could have different strict terms or higher interest rates. If you are deciding to take out a loan be sure to determine the conditions that work best for you and your business.