How to Get a Small Business Loan Without Collateral

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Getting a Small Business Loan Without Collateral: What You Need to Know

If you’re exploring your business financing options, you may be wondering: Can I get a small business loan without collateral?

After all, whether you’re a startup or you’ve been in business for a few years, it can be intimidating to put your assets on the line when agreeing to a business loan. This being said, although qualifying for business loans without collateral is possible, you’ll typically have to offer some other kind of security for the lender—like a personal guarantee or a blanket lien on your business assets. Here are the general steps to getting a business loan without collateral, explained below:

  1. Determine if you’re willing to agree to a personal guarantee or blanket lien in exchange for funding.
  2. Take steps to improve your credit score.
  3. Find lenders who offer the financing you need and who will agree to alternative security methods.
  4. Apply for an unsecured business loan and work with the lender to create an agreement without traditional collateral.
  5. Explore creative financing solutions.
  6. Consider funding via a business credit card.

 

How Collateral Works

Before we dive into the details regarding how to get a small business loan without collateral, let’s begin with a brief overview of collateral itself.

How does collateral work and why do most small business lenders require it anyway?

In essence, collateral—which can be real property, inventory, cash, unpaid invoices, etc.—serves as a security measure for lenders. When lenders offer you, or any business owner, a loan, they’re opening themselves up to significant risk—even if it looks like a borrower is qualified and will be able to pay back the loan, there is still the possibility of default. If a business owner defaults on a loan, then the lender will be losing their investment.

However, if a lender requires a borrower to put up collateral when they accept a business loan, they mitigate some of this risk. In this case, if a borrower defaults on a loan, the lender has the right to claim the collateral (in whatever form it may be) to make up for some of their losses.

This being said, when a lender is offering a business loan, they’re often providing a large amount of capital, and therefore, will almost always require collateral to secure the loan. Unfortunately for business owners, there aren’t true unsecured business loans; instead, there are other forms of security you may be able to offer as an alternative to typical types of collateral.

How to Get a Small Business Loan Without Collateral

The truth is it’s very difficult to get a business loan without collateral. Every lender wants to ensure that you’ll pay back your loan, so they’ll ask for some kind of security. In most cases, if you aren’t putting up a specific type of collateral for a business loan, you’ll need to secure the loan in another way, like with a personal guarantee or blanket lien.

Ultimately, then, if you’re wondering how to get a small business loan without collateral, here’s what you need to do:

  1. Consider if you’re willing to agree to a personal guarantee or blanket lien in exchange for funding.
  2. Find lenders who offer the financing you need and who will agree to alternative security methods.
  3. Apply for a loan and work with the lender to create an agreement without traditional collateral.
  4. If you can’t qualify for a loan without collateral or don’t want to agree to a personal guarantee or blanket lien, you’ll want to explore more creative financing options for your business.

With this overview in mind, let’s learn more about personal guarantees and blanket liens.

Personal Guarantee

The first security method you can use if you want to get a small business loan without collateral is a personal guarantee.

A personal guarantee makes you, the individual business owner, responsible for paying back the business’s debt in case of default. Although a personal guarantee may seem intimidating, it is an option to consider if you don’t want to put up your business’s assets to secure your loan.

How does a personal guarantee work?

You’ll be asked to sign a personal guarantee as part of your loan agreement. By signing, you’re promising to pay the loan back out of your personal assets if the business is unable to pay. Therefore, if your business defaults on the loan, the lender can seize your personal assets, such as your personal bank accounts, car, or other assets.

Blanket UCC Lien

The other type of security that you often see with business loans is a blanket lien, or a UCC-1 lien. Even when lenders don’t ask for a specific piece of collateral, many will put a blanket lien on your business. If your business defaults, this lien gives the lender the right to go after any or all of your assets to compensate for whatever remaining amount you owe them.

Generally, you’ll find these liens included in your business loan agreement; however, liens are often placed on your business without you even knowing. If you’ve ever taken a loan out in the past and right after you do, you start getting dozens of calls from other lenders and brokers, it is probably because a UCC lien was placed on your business. When a lender takes out a lien on your business, it’s public information—and therefore, when other lenders or brokers see this, they contact you to see if you need more financing. Obviously, these aren’t the types of lenders or brokers you want to be working with.

This being said, like a personal guarantee, a UCC filing allows a lender to mitigate their risk in case you default on your loan. It’s important to note that although you may be able to use either of these security methods to get a small business loan without collateral, in reality, a personal guarantee or UCC lien can actually be more burdensome. As opposed to traditional collateral, where you put up a specific piece of property or assets, a personal guarantee or blanket lien makes all personal or business assets fair game for the lender.

Therefore, even though this may be a difficult reality to face, if you’re truly worried about a lender seizing personal or business assets if you default, you should probably be worried about the default instead. If you think there is even a chance you won’t be able to make your loan payments, you shouldn’t be taking out the financing. You never want to take on debt when you don’t have a secure plan for how to pay it back.

Getting a Business Loan Without Collateral: Your Top 4 Options

As you can see, getting a business loan without collateral is not simple. However, if you are willing to consider a blanket lien or personal guarantee instead of a specific piece of collateral, you do have some options.

Ultimately, these business financing products will be your best choices for loans without collateral, even if they’re not truly unsecured loans.

  1. Online term loans
  2. SBA loans
  3. Merchant cash advances
  4. Business credit cards

Let’s learn more.

1. Online Term Loans

Online lenders offer both long- and short-term loans to businesses. Although both of these loans are technically term loans, they’re actually quite different.

Long-term loans are more like the traditional term loan you’re probably already familiar with. With these types of loans, the lender advances you a set amount of money that you repay with monthly payments over an extended time period, usually two to five years. Although not as affordable as an SBA loan, they are still one of the more affordable options, but have easier and faster applications than SBA or bank loans.

On the other hand, short-term loans are a product you might not be as familiar with. These are also structured as an advanced lump sum, but you pay them back with daily or weekly payments over a short period of time (usually three months to two years). These loans are more expensive than longer-term loans but are easier to qualify for. The daily or weekly payments can be tough on cash flow, but these types of loans can fund very fast.

Therefore, short-term business loans can be a good option for startups, as short-term lenders will sometimes extend loans to businesses that have been operating for as few as six months, as long as you are generating some revenue.

This being said, although you may be able to avoid traditional collateral with a short-term loan, almost all short-term lenders will require a personal guarantee and lien to secure the loan. For example, online lender OnDeck offers short-term loans and will not require collateral—however, they will require a personal guarantee from the owner who has signed the application and they’ll file a UCC lien after you’ve funded.

2. SBA Loans

SBA loans can be another option for business owners who are looking for a business loan without collateral. Although some SBA loans do require collateral, the general policy of the SBA is that an otherwise-qualified borrower can’t be turned away simply for lack of sufficient collateral.

While there are multiple SBA loan programs, the 7(a) loan is the most popular type of SBA loan. For 7(a) loans under $25,000, the lender isn’t required to take any specific collateral. For larger loans, the lender must follow the same collateral policies that they have for non-SBA loans. Additionally, for larger loans, the SBA also requires the lender to place a lien on the business’s assets and secure a personal guarantee from anyone who owns 20% or more of the business.

With this in mind, however, lenders have more flexibility in setting the loan-to-value ratio for SBA loans compared to traditional bank loans.

It’s also important to note that even if an SBA loan doesn’t require collateral, you may be required to provide an SBA loan down payment, which at a minimum, will be 10% of the loan amount.

Nevertheless, SBA loans are one of the most affordable loan options out there, second only to traditional bank loans. They have tough eligibility requirements and can take several weeks to process, but they are an option every business owner should consider—unless you need funding quickly or have below-average credit (less than 650).

3. Merchant Cash Advances

merchant cash advance is another option if you’re wondering how to get a small business loan without collateral.

With a merchant cash advance, you are advanced a set amount of cash from a financing company—and then you pay back that amount (plus fees) with a set percentage of your daily credit and debit card sales. In this way, the financing company is essentially buying a portion of your future sales. The benefit of this scenario is that you pay more when your business is busy and less when it slows down.

This being said, merchant cash advance providers will not typically require collateral (as your sales themselves serve as their own version of collateral) and they might even overlook personal guarantees and liens. However, the downside is that merchant cash advances are the most expensive financing option you’ll find on the market. Therefore, you’ll want to proceed with caution if this is the only financing option you’re offered, as you’ll want to be certain it won’t affect your business’s cash flow too badly.

4. Business Credit Cards

It’s very likely that you’re already familiar with business credit cards.

Credit cards are a great way to finance your business, and often act as a supplement to any traditional loans you might have in place. Plus, with most business credit cards, you won’t have to put up collateral, although it’s very likely you’ll be required to agree to a personal guarantee.

Every business owner should have a great credit card in their wallet, but there is a specific credit card type you should keep an eye out for if you’re looking for financing: 0% intro APR cards.

With a 0% intro APR business credit card, you’ll essentially be getting access to an interest-free loan for a specific period of time. Some of these introductory periods can even last as long as 12 months. This being said, if you’re going to use a business credit card in this way, you must have a plan in place. The intro period does not last forever, so you need to know when the end date is approaching and how you’re going to pay back any remaining balance before the interest kicks in.

Specifically, if you’re looking for a card with a great 0% intro APR period, we recommend the Amex Blue Business Plus or Blue Business Cash. Both of these cards have long intro 0% APR periods (after which time a variable APR will set in) and offer rewards on all purchases.

Explore Collateral-Free Loan Options

Alternative Funding Options

Ultimately, even if you opt for one of the four options we’ve just discussed, it’s very likely that you’ll be required to secure your financing in some way.

With this in mind, if you’re really looking to avoid putting up collateral or agreeing to a different security measure, you might decide to take your financing search outside the realm of business loans.

If you explore some alternative financing options, you’ll be more likely to find scenarios in which you won’t be required to secure your funding.

Let’s explore some of these solutions.

Self-Securing Loans

First, you might consider a self-securing loan. Although yes, this type of financing still falls under the realm of business loans, it’s inherently different from many of the products we’ve reviewed thus far.

To explain, with self-secured loans, the specific asset that you’re buying with your loan funds act as collateral for the loan—like with equipment financing or inventory financing. This being said, you would pursue these loan types if you needed money to buy a new piece of equipment or if you needed capital to stock your shelves with more inventory. After you buy the equipment or inventory, these items would serve as collateral on the loan you received, just like your house does in the case of a home loan.

Then, if you can’t pay back the loan, the lender can seize the equipment or inventory, just as they could seize your house.

With this setup, the lender is eliminating risk and you’re getting access to the funds you need without having to put up additional collateral.

With this in mind, another type of self-secured financing to consider is invoice financing. With invoice financing, lenders advance you a certain amount of money based on your current outstanding invoices. Usually, you can receive about 50% to 90% of the outstanding invoice amount. Then, after the customer pays the invoice, the lender advances you the remaining amount of the invoice, minus their fees. In this case, the unpaid invoices act as collateral for the financing you receive.

As you can see, these self-secured business loans (also known as asset-backed loans) aren’t quite the same as the other financing solutions we’ve reviewed. With these options, the collateral is, in essence, part of the transaction, just as your home is part of a mortgage transaction. So, if you are trying to get a small business loan without collateral (at least in the traditional sense), these can be great options.

Equity Financing

You also might consider equity financing as an alternative funding solution.

So far, all of the financing options we’ve discussed have been debt-based—in that you’re borrowing money and paying it back, plus interest. With equity financing, on the other hand, you offer ownership in your business in exchange for funding.

Most often, equity financing is thought of in terms of angel investors or venture capital firms, where these individuals or companies provide money to fast-growing startups in exchange for ownership or stock in the business.

Although it may be more difficult to acquire equity financing (depending, of course, on your business), it is an option that won’t require traditional collateral, guarantees, or liens. This being said, however, by receiving financing through this method, you will be offering up a piece of your business—which can come with its benefits and downsides.

There are a handful of equity financing options you can consider—from angel investors and venture capital firms to crowdfunding and asking friends and family to invest in your business.

Small Business Grants and Competitions

Finally, you might also consider small business grants or competitions as options to fund your business without collateral.

With business grants, you’ll have to qualify and apply for a specific program; however, if your business is chosen to receive the grant, you’ll receive funding that you won’t have to pay back.

Although it may be more difficult to rely on grants or competitions for your financing needs, it’s always worth keeping in mind that these options are out there. Ultimately, even though you’ll need to invest time and effort into finding the right grant program and going through the application process, the payoff will be significant if you can receive a grant.

This being said, there are hundreds of grants available for small businesses—from government grants to private grants and more. Plus, if your business is involved in technology, science, or related industries, you’ll be even more likely to qualify for many federal and state programs.

Frequently Asked Questions

The Bottom Line

At the end of the day, it’s important to remember: You never want to take on debt you don’t have a plan for paying back. Therefore, if you’re wondering how to get a small business loan without collateral, you may want to stop and ask yourself why that’s the case.

Why don’t you want to put up collateral?

If it’s because you don’t think you have anything valuable to offer or feel like you don’t have enough collateral for a business loan, then that is a valid concern. On the other hand, if you don’t want to put up collateral because you don’t want to deal with the hassle, that also makes sense. With both of these scenarios, however, it’s worth working with a lender to see if you do have something worth offering up or if you can find an alternative security measure that isn’t traditional collateral. By looking into the four options we discussed above, you might be able to find the right financing solution to meet your needs.

But, if the reason that you don’t want to put up collateral is that you’re worried about defaulting and having your assets seized, you’ll want to think twice about continuing your search for financing. You’ll want to get to a place where you feel confident in your future cash flow and your ability to pay back a loan before taking on debt you can’t handle.

Ultimately, when you’re looking for financing for your business, you should be focused on getting the most affordable loan option. If collateral, a personal guarantee, or a UCC lien can help you save money on a loan (which is often the case), that’s a good thing for your business. Remember: Getting the best terms should be the number one priority—whether your business loan requires collateral or not.

Explore Your Business Loan Options
Senior Contributing Writer at Fundera

Priyanka Prakash, JD

Priyanka Prakash is a senior contributing writer at Fundera.

Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.

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