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Business loans that don’t require collateral come in a variety of forms, including online loans, bank loans, Small Business Administration loans, invoice financing, equipment financing and inventory financing. That's the good news.
The bad news is that, in place of collateral, lenders will often raise interest rates and fees, or require a personal guarantee or lien agreement. This means you're likely to pay more for these loans, and your assets may still be on the hook if you default.
How Much Do You Need?
How do unsecured business loans work?
Loans are generally secured by collateral so that lenders have assets to liquidate if the borrower defaults on loan payments. Putting collateral on the table provides lenders with a safety net and raises the stakes for borrowers. Business loan collateral can come in the form of real estate, vehicles, equipment, personal savings and more.
If a borrower doesn’t put any collateral on the line, they’ll usually need to offer something else instead. Small-business owners may also consider emphasizing their success in areas like annual revenue, time in business or personal credit score to boost their chances of getting these types of loans. But even well-established, successful businesses might need to clear extra hurdles to avoid putting collateral on the line.
Requirements for business loans without collateral
Virtually all lenders have minimum standards for a company's annual revenue and time in business, and the owner's personal credit score may also be a factor. But unsecured business loans may involve other requirements designed to protect or incentivize the lender.
Personal guarantee: Even if you don’t have to offer collateral, a personal guarantee still gives lenders a legal right to your personal assets if you default on loan payments. All SBA loans, for example, require a personal guarantee from anyone who owns 20% or more of the business.
UCC lien: Under the terms of some loans, lenders can file a Uniform Commercial Code lien that gives them access to your business assets if you don’t repay the loan. In this scenario, your business assets essentially become collateral.
Elevated annual percentage rates: In general, you may find that unsecured loans have higher APRs across the board, since they’re riskier for lenders than a secured loan. Online loans have some of the highest APRs, while SBA loans and bank loans tend to have lower APRs.
Getting a business loan without collateral
The following forms of funding don’t technically require collateral, but they may require a personal guarantee or lien agreement. Terms and requirements vary from lender to lender.
Online business loans are often easier to apply for and quicker to fund than bank or SBA loans, but high interest rates can make them more expensive for the borrower. While they don’t all require collateral, borrowers may still have to sign a personal guarantee or agree to a blanket lien on their business assets. Added costs aside, online loans can be a good alternative for business owners who don’t meet traditional banks’ loan requirements, but who still have personal credit scores above 600 and have been in business for at least six months.
Some banks offer unsecured financing through business lines of credit or term loans, with amounts that commonly range from $5,000 to $100,000. Term loans offer an upfront lump sum of money, while business lines of credit only require you to pay interest on the money you borrow, up to a preset limit. Applying for a business loan through a bank will likely be more rigorous and time-consuming than applying for an online loan.
For SBA loans of $25,000 or less, borrowers do not need to offer collateral. However, all SBA loans, regardless of the amount, do require a personal guarantee from business owners with 20% or more equity. Unsecured SBA loans will most likely come in the form of a 7(a) loan, the most common type of SBA-backed funding, or a CDC/504 loan that collateralizes the property acquired through funding, which allows the borrower to avoid putting up other collateral.
Alternative financing options
These funding options collateralize the things being financed. While these types of financing aren’t technically unsecured, they don’t always require business owners to put any personal assets at risk.
Invoice financing: Also known as accounts receivable financing, invoice financing lends business owners money against customers’ unpaid invoices. Similar to a cash advance, it’s often easier to qualify for than bank loans and helps manage short-term cash flow issues. However, depending on the terms of the agreement, unpaid invoices may only be able to stand in as collateral up to a certain point. If the client never pays their invoice, the owner might have to make up for the sunk cost themselves.
Equipment financing: Equipment financing helps small-business owners buy equipment for their business and can come from banks, online lenders or the SBA. Loan repayment terms don’t usually stretch beyond the equipment’s lifespan.
Inventory financing: Entrepreneurs with retail stores or manufacturing businesses can apply for inventory financing to purchase items they’ll later sell or use to produce other products. Like invoice financing, it’s generally used as short-term funding.
Knowing exactly how you’ll use potential financing — whether you need to buy equipment, inventory or property, or simply boost your working capital — plays a big role in finding the best unsecured business loan for you. Also consider terms, requirements and the cost of borrowing.