How to Get a Small Business Loan Without Collateral

Many entrepreneurs turn to business loans for financing when a startup business needs funds. Although secured business loans can offer better interest rates and repayment terms, they require business collateral, an asset you risk losing if you default on the loan. An unsecured business loan doesn’t require collateral, though there may be other requirements, like a personal guarantee from the business owner.

Entrepreneurs with bad credit or who lack business collateral can find unsecured business loans through various outlets, including online and traditional lenders, the Small Business Administration (SBA) or a business line of credit. With several options available, knowing the different types of no-collateral business loans and weighing the pros and cons of each can help you make the best choice for your small business.

Find the right type of no-collateral business loan

There is no “one-size-fits-all” loan type with no-collateral business loans. The best unsecured business loans available for your company can vary depending on your funding needs, how you plan to use the money and how fast you need funding. Eligibility requirements can also differ.

Here’s a look at some common types of business loans that don’t require collateral

SBA 7(a) loans under $25,000

The SBA offers several business loan types, but the SBA 7(a) loan is ideal for many business owners, as they can use the funds for just about any purpose. Though most SBA 7(a) loans require collateral, entrepreneurs may be able to get business loans without collateral if they apply for $25,000 or less.

SBA 7(a) loans typically have lower interest rates and longer repayment options than other unsecured business loans, so may be a good fit for startups with small funding needs. But the SBA can have more robust qualifications and a longer application process, so may not work for those needing fast funding. Plus, the final decision on whether to provide collateral rests with the lender.

Equipment financing

If you need equipment for your business but don’t have the collateral many lenders require, an unsecured business loan may be your best option. Online alternative lenders, like peer-to-peer lenders and crowdfunding options, can provide fast unsecured business loans compared to other no-collateral business lenders.

Equipment financiers can offer business loans without collateral because the purchased equipment secures the loan and can be repossessed if you default on the loan. For example, the lender can take back the truck if you finance a semi truck and default on your payments. This option can be a good fit for startups and business owners with bad credit or who need fast funding for equipment purchases.

Lines of credit

A business line of credit provides a renewable funding source business owners can draw from as they need it, up to the maximum credit limit. The available credit gets refreshed with each repayment, providing a revolving fund that can be a good fit for startups, new businesses with little credit history or those needing flexible or emergency funding.

Repayments include interest, which is typically higher with less favorable loan terms for those getting an unsecured business loan. Lenders can also include various small business loan fees, such as origination, annual, maintenance or draw fees, which increase the overall cost of this funding option.

Inventory financing

Inventory financing is a short-term funding solution that allows entrepreneurs to buy product manufacturing supplies or sell in their retail store or wholesale shop. Rather than providing personal or business assets as collateral, the product acts as collateral in inventory financing. Interest rates can be high, especially if you have bad credit or have limited business history.

Invoice factoring

Another short-term lending option is invoice factoring, or accounts receivable financing. Lenders providing invoice factoring purchase your customers’ unpaid invoices, paying a portion upfront and the rest after the financier receives payment.

This lending option uses the customers’ creditworthiness rather than the business or owner’s credit, so it may be a good fit for business owners with poor credit. Like inventory financing, fees can be high, but invoice factoring could be a viable option for those who need fast funding.

Merchant cash advances

A merchant cash advance (MCA) provides a lump sum based on future revenue. Rather than pay a set business loan interest rate, MCAs require factor rate repayments, which is a daily or weekly percentage of your company’s sales. Merchant cash advances can be a good fit for startups, seasonal businesses, entrepreneurs with poor credit or those with fluctuating revenue.

But this option can be costly, as no usury laws limit how much MCA lenders can charge. There is a potential you could end up paying the equivalent of triple-digit interest rates, especially when sales are high.

Find a lender that offers business loans without collateral

Besides the SBA, banks and online lenders offer business loans without collateral. To mitigate risk, lenders may require certain measures before approving the loan, such as a personal guarantee, Uniform Commercial Code (UCC) lien or business asset blanket lien.

When you default on the loan, lenders can seize personal assets you used to guarantee the loan. A UCC or blanket lien provides lenders access to business assets as collateral if the business defaults on payments.

While online loans can be more costly, they are typically easier to apply for and fund faster than SBA or traditional bank loans. Term bank small business loans can provide a lump sum amount, while business lines of credit provide a preset limit you can access for a specified period, only requiring interest payments on what you borrow. Bank and SBA loans take longer with stricter requirements than online lending options.

Check your eligibility for a business loan with no collateral

Although unsecured business loans don’t require collateral, there are requirements that you’ll have to meet to get approval and funding. Specific requirements can vary depending on the lender, loan amount and type.

Expect to provide the following when applying for a business loan with no collateral:

• A business plan
• Annual revenue that meets the lenders’ minimum requirements
• Number of years in the business
• Personal financial history
• A loan proposal (SBA requirement)
• A list of business debts and financial obligations

Your business credit score may be used to prove creditworthiness if you are a registered business. But your personal credit score can still be used to assess your creditworthiness. So it’s best to check your personal and business credit reports and ensure there are no errors.

Be prepared to provide a personal guarantee

When you apply for an unsecured business loan or business line of credit, be prepared to provide a personal guarantee instead of collateral. A personal guarantee requires personal assets as collateral, such as your personal savings, investments or home equity. If the business defaults on payments, the lender can file a court case and seek a judgment against you personally or seize your assets to pay back the debt.

Although a limited liability company (LLC) provides certain protections for its members, a personal guarantee for an unsecured LLC loan can void the protections the LLC provides. Be sure you understand the implications of a personal guarantee when using it as collateral for an unsecured business loan.

Pros and cons of unsecured business loans

Weighing the pros and cons of unsecured business loans can help you determine if this solution is best for your business.

Pros

• No collateral requirement. Unsecured business loans provide a lower financial risk to the business than loans that require business collateral for approval and loan terms.
• Easier application process. The application is usually easier for unsecured loans if you apply through online lenders or use alternative solutions, like crowdfunding or peer-to-peer lending.
• Faster funding. With no collateral appraisal or documentation needed, funding is typically faster with an unsecured loan. Entrepreneurs looking for fast unsecured business loans may benefit the most from online lenders.

Cons

• Potential personal guarantee requirement. Lenders wanting to mitigate risk on an unsecured business loan may require a personal guarantee, which can put the owner’s assets at risk.
• More expensive. Unsecured business loans typically come with more fees and higher interest rates than secured business loans. Businesses with bad credit tend to pay the most.
• Less favorable terms. Business loans with no collateral usually have less favorable terms, like shorter repayment schedules and smaller loan amounts.

Bottom line

Business loans without collateral provide startups, businesses with limited history and poor credit with the ability to secure financing. But unsecured business loans can come at a cost, including higher fees and interest rates, shorter repayment periods and lower loan amounts. Some lenders may also require a personal guarantee as collateral, which can jeopardize personal assets if the business defaults on payments.

Fast unsecured business loans typically come from online lenders, while traditional bank lenders and the SBA take time for approval and funding. But you may get more favorable terms with traditional lenders than online lenders. Consider your loan needs, how fast you need funding and your business’s creditworthiness to determine the best unsecured business loan for your company.

Frequently asked questions

• How much SBA loan can I get without collateral?

  The SBA will fund up to $25,000 in a 7(a) business loan without collateral. If you want to apply for more than $25,000, you’ll have to provide some form of collateral, which could include business real estate or other assets.

• How do I start a business with no money or collateral?

  Although starting a business with no money or collateral can be challenging, it’s not impossible. You can look for alternative financing options, like peer-to-peer lending, grants or crowdfunding, whether by strangers or friends and family. Business credit cards and SBA 7(a) loans under $25,000 are also an option, if you don’t need significant funds. Free resources are also available, like the SBA’s volunteer mentor network, SCORE, or tapping into your local or online business community through chambers of commerce, trade shows and industry events.

• Do banks give business loans without collateral?

  Yes, banks give business loans without collateral, though eligibility requirements are typically more strict than secured business loans. Traditional banks, like Wells Fargo and Bank of America, offer unsecured business loans, as do online lenders and the SBA through 7(a) loans. But unsecured business loans and business lines of credit can be more costly, with higher interest rates and fees.