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Four Steps to Getting a Small Business Loan Without Collateral

The loan is available, but loan terms and approval requirements differ widely

By Richard Best

Updated November 30 2022

Review by Margaret James

If you require an unsecured small-business loan — either to fund your next stage of expansion or to keep your business on the right path in the event of an unexpected crisis, one important thing to think about is whether you’ll be expected to provide collateral to the table.

Collateral acts as an insurance policy to the loaner in case that you are in default on the loan and cannot pay it back for any reason. If your business is short of assets that could be pledged as security and you are looking for a non-collateral business loan might be your highest priority.

It’s not difficult to locate commercial loans which don’t need collateral as a prerequisite to be approved. Before you apply to one of these loans it is essential to conduct your own research so you know what to anticipate.

Important Takeaways

You can find uninsured business loans via the Small Business Administration and online lenders.

However, this doesn’t mean you won’t be required to take on some degree of personal financial responsibility in relation to business credit.

Peer-to peer lending is another alternative to pursuing business loans with no collateral requirements.

Lenders may charge higher fees or rates for business loans.

1. Learn about your options for no-collateral Business Loans

The first step to get a business loan that doesn’t require collateral is to determine what alternatives are available. Non-collateral loans are offered by several lenders, but loan conditions and requirements for approval can be very different.

SBA 7(a) Loans

The Small Business Administration (SBA) offers loans for small-business owners through its network of lenders. There are many SBA loan programs you might consider when you need working capital, with the 7(a) program being one of the most well-known. This SBA 7(a) programme does not need collateral to make loans of up to $25,000, which is great when you need to borrow a small amount of money.1

For loans greater than $350,000, the SBA requires lenders to secure loans to the maximum extent feasible, which is as much as the loan amount. If you don’t possess enough business assets to be able to guarantee the loan the lender can use the personal real estate that you hold as collateral. But, having no collateral isn’t an issue or the reason you shouldn’t be able to get a 7(a) loan if you have the other requirements.1

SBA Disaster Loans

Additionally to 7(a) loans, the SBA provides disaster relief loans for businesses that experience losses resulting from natural disasters, as well as economic crises. For example businesses that have suffered losses as a result of a government mandate to shut down could apply for an economic injury loan.

The down payment of an SBA loan can range from 10 to 30%, however it will vary based on the particular loan and borrower.2

Like 7(a) loans, disaster loans under $25,000 don’t require collateral. If you’re borrowing over the amount of $25,000, collateral is required, however, as with 7(a) loans the SBA won’t deny you an loan due to the lack of collateral alone.3

Small Business loans that are online and other alternatives. Loans

Online and alternative lenders are able to provide a variety of loans that do not require collateral to meet your business’ working-capital needs. The kinds of loans you might be able to obtain without having to provide collateral upfront are as follows:

Term The loan

Invoice Financing (also known as «accounts for receivables»)

Inventory Financing

Merchant Cash Advance

Equipment Financing

Purchase Order Financing

Line of Credit

In these types of financing for small businesses it is possible that there is some type of security required, but it isn’t money or another tangible item you need to provide. For instance, in the case of invoice financing, you’re leveraging your outstanding invoices to get money.

With a merchant cash advance it is borrowing against the value of your future credit card receipts. In the case of loaning equipment to finance, then the item that you are leasing or buying is used as collateral in the loan.

Peer-to peer lending is another option for small-business financing that doesn’t require collateral. These lending services connect potential investors with small-business owners who need loans. Investors pool their funds to fund the loan, and owners repay it in the same way as any other loan and with interest. These loans are not secured, meaning that there is no collateral required.

2. Review Your Business Financials to determine if you qualify

Some types of no-collateral small-business financing might be more difficult to get than others. If you’re applying for an SBA 7(a) loan, for instance, you have to have at minimum two years of operational history under your belt, meet the definitions of a qualified small-business and possess an acceptable credit score as well as revenue SBA lenders require. The SBA also requires that you explore all other borrowing options before submitting an application for the 7(a) loan.4

With online and alternative lenders, on the other hand, the requirements may be more fluid. For instance, a lower credit score might not be an obstacle to getting a merchant cash advance or invoicing financing. In fact, it is possible to obtain start-up loans via online or alternative lenders that require only six months of operational history.

The next step to obtain a business loan without collateral requirements is to evaluate your company and its financial standing. That includes things like:

Examining your personal and business credit scores

Update your balance sheet

Making important financial documents, such as the profit and loss statement and cash flow statements

Examining your business’s costs and cash flow overall

The goal is twofold: to evaluate the creditworthiness of an loan and to assess the ability of you to repay it. Inability to pay back the loan could damage your credit score which makes it more difficult to secure any financing in the future.

Some types of no-collateral loans–such as a cash advance for merchants or invoice financing–rely on a factor rate rather than an interest rate in determining the amount of borrowing. Based on the terms of the loan and the speed at which it’s paid, the factor rate can easily translate into a two- or three-digit effective APR.

3. Be Prepared for a Personal Garanty or UCC Lien Instead

Although you might be qualified for a modest business loan without having to offer collateral, this doesn’t mean the lender won’t ask for other conditions. In particular, you could be asked to sign a personal guarantee or consent to a Uniform Commercial Code (UCC) lien.

A personal guarantee is what it looks like it’s an agreement in which you personally repay the debt that your company has taken on. Personal guarantees are typically a requirement for no-collateral loans as well as small-business credit cards. Because the lender does not have collateral it can attach if you don’t pay the loan, it has the right to sue you in order to collect a unpaid debt.

An Uniform Commercial Code lien is a little different. This is essentially an umbrella lien that permits the lender to take possession of all or any of your company’s assets in the event that you fail to pay a loan. In other words, even if you did not provide any collateral to the table in order to obtain the loan, a UCC lien would give the lender a backdoor option of attaching assets in case you don’t pay.5

4. Consider the Terms Carefully Before Signing

If you’ve made an application for a small-business loan with no collateral and been approved, the last step is understanding the loan conditions and terms. When reading the loan contract, be sure to pay close attention at the rate of interest, the annual percentage rate (APR) and the payment schedule, as well as the loan period.

You must know how long it will take you to pay the loan off and what your amount of debt is to when interest and fees are taken into account.

Speaking of fees, check for the charges you’re charged. For instance, it could include a loan origination fee or a prepayment penalty. When your financial situation allows for you to repay the loan earlier, you do not need to pay penalties to make it happen.

Finally, consider whether personal guarantees or a UCC loan is necessary as part of your borrowing agreement. While you may have the best intentions to pay back the loan, it’s important to know how these conditions could affect your company if you’re unable to hold up your word for any reason.

How difficult is it to obtain a Small Business Loan?

It can be difficult to secure a small business loan without a strong personal credit score and proof of stable revenues from your company. In the absence of these requirements, the chance of granting a loan is very high for a lender. In the event of a wide range of aspects, loan offers may require collateral or high rates of interest if a bank finds the profile of an applicant to be less than solid. These requirements may strain the business. If you think your credit score or company’s profits aren’t enough and you are looking for funding through other sources, such as the money of family and friends or crowdsourcing, could be a better option.

Do SBA Loans require a Down payment?

Absolutely, SBA loans are required to make the payment of a down. The down payment will vary according to the particular loan and borrower; however the most common down payment of 10 percent. The amount may vary, and can up to 30% in some cases.2

Are you able to use SBA loans for personal use?

SBA loans cannot be allowed to be used for personal purposes. They can only be used to fund your business. This means financing business expenses and expanding your business and even salaries, including your own. SBA loans cannot be used to pay off your personal debt like your mortgage or personal credit card balances.

The Bottom Line

Obtaining a loan for your business could be challenging, especially when you have to put collateral on the line and increase the risk for you. The Small Business Administration (SBA) is a fantastic source for entrepreneurs that can provide financing without collateral.

Outside of the SBA companies can also obtain loans with no collateral but it’s important to understand the conditions before making a decision to sign the agreement. These loans may come with additional strict conditions or high interest rates. If you are deciding to take out a loan, determine what parameters are most beneficial for you and your business.

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