When it comes to finding a loan that makes sense for your business, it’s only right that you look for one that comes with few risks and low rates. That’s why many business owners are always searching for business loans that don’t require them to put up collateral.
By Meredith Wood
Collateral is an asset that a lender will accept as “security” for a loan. You could use your car, property, equipment, inventory, or even your home as collateral for business loans—though every lender has different requirements.
Not everyone is comfortable with the idea of their valuable assets serving as collateral for a loan, which is why “unsecured” loans are so sought-after.
The thing is, there are very few examples of unsecured loans. Even if a lender doesn’t ask for collateral, you still may need to sign a personal guarantee or agree to a blanket lien on your assets, allowing the lender to seize those assets in case you default. Additionally, the interest rates on unsecured loans tend to be higher, to offset the risk the lender is taking on. There always needs to be a way for a lender to recoup their funding.
That being said, there are a few examples of affordable business loans that don’t require collateral. Depending on your financing needs, they could be a great fit. Here are five of the best examples:
SBA 7(a) loans
Loans backed by the Small Business Administration are some of the best in the world of small business financing. The SBA partially guarantees bank loans through a variety of programs, encouraging banks to lend to small businesses at low interest rates.
There are different SBA loan options for businesses that need different amounts of funding, for various uses. For example, the SBA 7(a) is an excellent all-purpose loan of up to $5 million—used for general working capital, buying equipment, refinancing existing debt, and leasehold improvements, among other needs. SBA 504 loans, on the other hand, go up to $20 million, mainly for the purpose of buying real estate and other large assets.
Some SBA loans, and some SBA loan amounts, will require collateral. SBA 7(a) loans under $25,000, however, do not. Then, for SBA 7(a) loans for amounts of $350,000 or less, the bank lender must follow the same collateral policies they have for non-SBA loans.
That means that in some scenarios, when the loan amount is under $350,000, a borrowing business might not need to put up collateral if the rest of their financials satisfy the lender. Since this can vary from lender to lender and situation to situation, it’s best to discuss particulars with your chosen SBA lender upfront before you begin applying.
Online unsecured business lines of credit
Online lenders have emerged as a major player in the small business lending space. Although typically their interest rates are higher and their repayment terms shorter than loans offered by banks, their financing products are easier to qualify for. Plus, you can sometimes get your funds in as little as one business day.
There aren’t many unsecured business term loans from online lenders to speak of, but a few—Kabbage and OnDeck, for example—do offer unsecured business lines of credit.
LOCs are a prized financing option due to their flexibility. They work a bit like a credit card: You receive access to a pool of funds that you can draw from over and over, repaying each draw on its own schedule and replenishing the pool along the way. Plus, you don’t pay fees on your line when you’re not using it.
These products don’t require collateral, and can act as useful sources of startup financing, or are helpful if you have an emergency expense you need to cover (such as reopening your store after a natural disaster). Secured LOCs will have better interest rates, but in a pinch, these options are a good financial backstop to have in your pocket.
Business credit cards
Speaking of credit cards: Most people don’t think of a business credit card as a form of business financing, but what else is a credit card if not a short-term loan?
Business credit cards are an excellent financial tool, since they allow you to put off paying your business expenses on a short-term basis, all the while accruing rewards points that you can reinvest right back into your business.
Plus, some elite credit cards come with an introductory offer of 0% APR financing for a certain amount of time—typically between 9-15 months. That means you won’t have to pay interest on your purchases (assuming you meet minimum payment requirements) for sometimes over a year. No other loan offer can touch that.
Keep in mind in mind that once that intro APR period ends, your interest rate will set in at a number that reflects your creditworthiness and the going market rate—so, read the fine print from your issuer to avoid suddenly getting stuck with painful and expensive interest payments.
There’s a limit to the amount of money you can put on a credit card, but when funding gaps arise, this can be a good option.
If you have a very specific financing need that centers around a new piece of equipment—heavy machinery on a worksite, or a delivery vehicle, for example—equipment financing is a “self-secured” funding option. A lender will extend you up to 100% of the cost of that equipment, and then you pay them back plus interest over time.
Equipment financing is self-secured because the equipment itself acts as collateral for the loan. If for some reason you default, the lender will seize the equipment you’ve been paying off—and that’s it. Obviously, it’s not a great scenario, but considering you won’t have to put any other assets on the line, it’s one worth exploring.
If you have a service-based business and bill your customers with invoices, you’re probably used to waiting for those customers to send their payment. As a result, your cash flow might look choppy and inconsistent, forcing you to be late on your own payments.
Invoice financing is one solution here, and it’s also self-secured. An invoice financing lender will advance you most of what you’re owed according to your outstanding invoices, keeping a remaining percentage until your clients pay in full. Then you receive the full amount minus fees.
Again, the invoice here serves as collateral. What you owe to a lender won’t be more than the amount of said invoice.
When it comes to obtaining business loans without collateral, these are your best options. A merchant cash advance is another possibility, but MCAs are typically one of the most expensive business loan options on the market. Explore the above products first—they’ll be lighter on your wallet in the long run, and that’s good business.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Meredith is also the Senior Financial and B2B Correspondent for AlleyWire.