If you need to get a small business loan without collateral, the process may be more challenging, but it is not impossible. If your small business needs financing — whether that’s to make up for a financial loss, maintain a healthy cash flow, or invest in a new business opportunity — you’re hardly alone.
According to a recent Forbes report, 48% of small business owners lost money in the past year and say they’re struggling with debt. Unfortunately, obtaining capital and financing is more complicated than ever. In one study, the Institute for Local Self-Reliance found that 43% of small businesses tried to get a loan in the past four years but were unsuccessful.
Finding startup business loans and small business financing isn’t always easy, but it can be made much more straightforward. All it takes is a proper understanding of your financial situation and potential financing options (in some cases, this can even include a small business loan without collateral) and the right financial partner who’s willing to work with you and your unique needs and goals.
Conventional Secured Loans
When it comes to small business financing, most small business loans originate from traditional lenders like banks and credit unions.
The Institute for Self-Reliance reports that of the nearly $700 billion in lending made to small businesses and startups each year, big banks provide approximately 93% of that small business credit.
Banks, credit unions, and similar firms typically offer conventional secured loans. Just as its name implies, a secured business loan is “secured” because a specific asset is provided as collateral to give the bank some financial security.
This collateral can be the equipment you’re buying with the loan (e.g., manufacturing equipment, office equipment, etc.), the real estate investment you’re making with the financing (e.g., a new building or piece of land), or similar collateral.
Conventional business loans are ideal for established small businesses that have a great credit score, a long and positive track record, and collateral to give the bank some peace of mind as it shoulders the risk of financing your operations.
However, getting approved for a conventional small business loan can be onerous or even impossible for some small companies because of factors like:
- Credit needed for small business loans (if you’re a new business or a struggling business, you may not have the credit score or business history required)
- Strict small loan requirements prevent you from using the financing for some critical scenarios where there’s no collateral involved (e.g., invoicing, payroll, etc.)
- Small business loan eligibility problems
In these scenarios, you’re not without options. A small business loan without collateral may be a smart financial move for many companies.
Small Business Loans Without Collateral
A no-collateral small business loan opens up your financing options, especially if you’ve got no credit, poor credit, or are trying to finance a situation or investment that’s not traditionally covered by secured loan terms.
There are several forms of no-collateral, unsecured small business loans on the market. Examples include:
- Small Business Administration Loans: The federal government will, in some cases, offer a guarantee to the bank and cover the risk so that you don’t have to provide collateral.
- Online Long-term Loans: Online lenders often have far more flexibility and financial solutions to offer than big banks and credit unions avoid. A long-term loan from an online lender can mimic many of the same benefits and features of a traditional secured loan.
- Merchant Cash Advances: These loans are often confused with secured business loans, but they’re a bit different. Rather than securing collateral now, the lender is securing your future assets.
- Business Credit Cards: More and more small business owners are trying to take a DIY approach to bridge financing and putting expenses on a credit card. Due to the high-interest rates associated with this option, this may be financially unwise.
Let’s take business credit cards out of the equation since they’re not true lending in the same sense as long-term loans or SBA loans.
There are a few distinct pros and cons when choosing to skip over conventional lending and go the route of selecting a small business loan without collateral.
A no-collateral small business loan often has lower eligibility requirements and is less strict about how you use the financing provided. This opens the door for small businesses that have poor credit histories or need to finance a business opportunity that isn’t covered by conventional loans.
A no-collateral loan is also often:
- Easier to apply for (less paperwork)
- Faster to get approved
- More flexible when it comes to payment terms and payment windows
- Designed specifically for small businesses and startups, with features and services to match your needs
One of the primary disadvantages of some no-collateral small business financing is the interest rates. Conventional loans reduce the bank’s risk with secured assets, and the lower risk means the bank is often more willing to extend a low-interest rate to you.
In contrast, since no assets are connected to your no-collateral financing, the lender is shouldering more risk. This increased risk is often reflected in an increased interest rate.
Other potential disadvantages include:
- Confusing loan programs or options to choose from
- Higher eligibility requirements if the SBA backs your no-collateral loan
- No in-person customer service representative or physical office if you obtain financing from an online lender
Types of Small Business Loans Available Without Collateral
Depending on the financial institution or partner you’re working with, your options will vary incredibly. However, if you work with a leading no-collateral small business financing provider, you’ll be able to access custom-designed unsecured business funding that requires no personal guarantee and no collateral. Instead, this unique funding model is based on revenue-based financing (RBF).
Without the restraints of traditional collateral funding, this form of small business lending offers unlimited possibilities and flexibility for your small business.
Other forms of lending that may be available to you without collateral include the below:
- Bank-only ACH cash advances
- Working capital
- Bridge funding
- Next-day funding
- Short- and long-term funding
- Merchant cash advances