Can I get a small business loan without collateral?
- 1 Can I get a small business loan without collateral?
- 1.1 How does a traditional secured loan work?
- 1.2 Alternatives to collateral, or collateral in other names?
- 1.3 How difficult is it to obtain a small business loan without collateral?
- 1.4 Trade-off options
Can I get a small business loan without collateral?
When planning to start or develop a business, many owners are keen to learn how to obtain a small business loan without a mortgage to fund their ideas. When it comes to loans, there are two main types: unsecured and secured.
The main difference between secured loans and unsecured loans is that secured loans require an asset as security. In other words, it is a mortgage business loan that requires you to provide something in exchange for financing (for example, commercial real estate or company cars).
An unsecured loan is an unsecured loan without such requirements. Although some commercial loans do not require collateral, they are not as easy to find or obtain as standard secured loans.
Although we cannot advise you on which one is more suitable for you, it is helpful to understand these two options if you are seeking commercial funding.
How does a traditional secured loan work?
Most people are familiar with the concept of secured loans because they may have used this type of loan as consumers.
For example, a mortgage is the most famous secured loan, and the collateral is your house. If you fail to pay the mortgage, eventually, the lender will be able to recover the property.
The whole purpose of establishing a secured loan is to reduce the risk of the lender. This is why so many lenders are more willing to only provide such loans, especially for new startups with higher inherent risks.
Alternatives to collateral, or collateral in other names?
If you are looking for an unsecured loan, the options are limited. Moreover, even so, many lenders still pass other requirements to reduce risk, which give them leverage in the event of default, including:
- Personal guarantee: If you use a personal guarantee instead of a specific collateral loan, you will guarantee that you as an individual will repay the debt when your company defaults on the loan.
- A blanket UCC lien: This is another option when the lender does not require specific collateral. A comprehensive UCC lien can be placed on the enterprise. This means that if it defaults on payment, the lender can recover the company’s assets as compensation for the remaining unpaid amount.
Although none of these options can be fully deducted from the equation, it is important to fully understand what they mean for you and your company before signing the dotted line.
How difficult is it to obtain a small business loan without collateral?
If you wish to obtain an unsecured business loan for your start-up or established small business, there are several options to consider. These include:
SBA loans are supported by the Small Business Administration, a federal agency. This type of loan may or may not require collateral, and even new startups can obtain loans without collateral through approved SBA lenders (for example, Some 7(a) loans are less than $25,000). However, there are other SBA loans that require collateral, so it is important to check before signing.
Is it difficult to get an SBA loan?
they can. If you are looking for a relatively affordable form of loan, SBA loans may be your best choice. But keep in mind that SBA loans may take more time to apply, take longer to process, and they usually have strict approval eligibility requirements.
To learn more about SBA loans and how to apply, please check our Comprehensive Guide to SBA Loans.
Online long-term loan
There are many online lenders that provide short-term and long-term loans to companies. Although both are “term loans,” there are some key differences to keep in mind.
First, long-term loans are more traditional. The lender will prepay a certain amount, which will be repaid monthly over a period of time.Although generally not as good as SBA loan, They are relatively affordable, and application is usually faster and easier.
On the other hand, short-term loans also include a lump-sum advance payment to the borrower, which is then repaid on a weekly or daily basis within a short period of approximately 3 to 18 months. This type of loan is usually more expensive, although its eligibility requirements have been relaxed. Compared with traditional bank loans, it is also very easy to apply.
Merchant Cash Advance (MCA)
Although merchant cash advances seem to require collateral, they actually do not. In fact, the financing company will only buy your future assets-any assets you own now.
When the business receives cash advance from the merchant, the financing company will advance the specified amount and then use a specific percentage of sales to repay it. Essentially, it bought a portion of the company’s future sales.
The eligibility requirements for such loans are relatively loose, but there may be cash flow risks. Be cautious when choosing this option, as many MCAs involve complex contracts and various fees.
Before you choose MCA, Read this article to compare MCA and SBA loans and business credit lines.
Business credit card
Commercial credit cards are definitely something you are already familiar with. They are actually a very good way to raise money for businesses—especially when supplementing traditional loans.
A zero-interest introductory APR card is usually the best choice because it is essentially an interest-free loan that lasts for a specified introductory period. This will vary from card to card and can be as long as 15 months.
If you choose this option, you must have a clear repayment plan because you need to pay off the balance before the end of the introductory period and the start of the regular APR.
Private lenders and fintech companies
Today, as long as business owners provide personal guarantees, many private lenders are willing to provide unsecured loans. This can be in the form of a principal, an asset, or a commodity. Although, strictly speaking, this is not an unsecured loan, there are more options for the goods or assets you can use.
Technological innovation has led to the emergence of new financial technology companies that can quickly provide financing channels with relatively little paperwork.
and Fund box, You can apply for financing online without any specific collateral and expect to make a credit decision in just a few minutes (actually 3 minutes, based on the median decision time of Fundbox customers). All Fundbox customers are subject to the UCC-1 blanket lien. Learn more about how Fundbox loans work.
When taking a loan to fund your business, consider whether you really prefer options that do not require collateral and why. If you are worried that you may default and eventually let the lender confiscate your assets, then now may not be the right time to seek financing.
Do you think you will be in a safer financial situation soon? Or do you really need financing now to improve your position and save your business? If you are confident about your future operational success, you can choose to wait and apply for an unsecured loan.
On the other hand, sometimes you don’t worry about losing assets at all. On the contrary, you may be more concerned about the speed and ease of obtaining funds. Some owners spend 30 hours or more on paperwork just to apply for a traditional term loan to fund their business, while others think they just don’t have time to spare.
If you are just worried about the troubles and lengthy paperwork that traditional loans may require, then a faster FinTech financing solution may be exactly what you are looking for.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material is for reference only and is not intended to be provided and should not be used as a basis for tax, legal or accounting advice. Before conducting any transaction, you should consult your tax, legal and accounting advisors.