How to get a small business loan without collateral

A business loan without collateral is an unsecured business loan, which allows you to get a loan without backing it with assets. This type of loan works well if you don’t have many business assets or you don’t want to use valuable assets to guarantee repayment.

You can get a variety of business loans without collateral, including business lines of credit, merchant cash advances or an SBA 7(a) loan of $50,000 or less. The downside is that unsecured loans are usually reserved for borrowers with strong credit and solid financial profiles.

If you qualify, expect higher interest rates and less favorable repayment terms than secured loans. To make the best decision for your business, compare the different types of business loans without collateral, and find the right lender that offers the best loan terms.

How do small business loans without collateral work?

Getting a small business loan with no collateral works similarly to getting a secured business loan. But when you apply, you won’t list any business assets as security for the loan.

This means that the lender can’t immediately seize your assets if you falter on loan repayments, though they may use other legal means to take business assets. You will probably need to sign a personal guarantee, which allows the lender to also seize personal assets to repay the loan.

As long as you can manage the loan repayments, getting a loan without collateral will feel the same as a secured loan. You may see higher interest rates for an unsecured loan than with a secured loan.

Steps to getting a small business loan without collateral

When applying for a small business loan without collateral, you will need to follow a few steps:

1. Find a loan and lender that offers unsecured business loans. Most banks and online lenders offer unsecured loans, but you’ll want to check the website or application to make sure.
2. Check the minimum requirements. Lenders often set requirements for minimum time in business, annual revenue and credit score. These may be listed on their website.
3. Estimate loan repayments. You can estimate loan repayments using a business loan calculator. Then, plug in the repayment amount into your business budget to see if you can handle repayments.
4. Gather your business’s financial documents. Have your business’s financial statements ready when you apply, such as your business bank statements, profit and loss statements and balance sheet.
5. Apply for the business loan. You may need to apply online or in person, depending on the lender. Unless you get a fast business loan, be patient since lenders often take a few days to a week to determine whether you’re approved.

1. Find the right type of no collateral business loan

You won’t find a one-size-fits-all option that fits every business’s needs. The right no collateral business loan will depend on what you plan to use the funds for, how much you need and when you need it.

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

Term loans

Term loans are business loans with fixed repayment terms, such as five years, and can come either secured or unsecured. The loan offers a one-time payment of funds that you can use for a specified purpose.

Term loans can be either short or long term, depending on what you qualify for. Short-term loans tend to offer repayments of 24 months or less. The repayment schedule for term loans is typically monthly but can vary.

SBA 7(a) loans under $50,000

The SBA offers several types of business loans, but the SBA 7(a) loan is the most common option that can be used for a variety of purposes. Most SBA loans require collateral, but you can get approved for SBA loan amounts of $50,000 or less without collateral. If you’re applying for a larger loan, the lender will use their standard collateral policy.

The benefit of SBA 7(a) loans is that they come with long repayment terms and competitive interest rates. The SBA sets a maximum interest rate that lenders are allowed to charge.

But, SBA loans can have strict requirements to apply, such as requiring several years in business or strong revenue. In addition, the approval process is known to take 30 to 90 days, which is not ideal if you need a fast business loan.

Lines of credit

A business line of credit offers business loans up to a set credit limit, such as $250,000. Once approved, you can borrow up to that amount at any time within the draw period. You may pay a draw fee each time you make a withdrawal.

Most lines of credit are revolving, which means that the credit limit replenishes as you repay previous draws, allowing you to borrow from the line of credit again. When you withdraw funds, you’ll pay interest on the principal amount that you withdraw. You may also pay additional fees, including the draw fee, an annual fee or a monthly maintenance fee for keeping the line of credit open.

Business lines of credit tend to have more lenient requirements than other business loans. They work well for startup businesses, businesses with little credit history or for businesses preparing for unexpected expenses in the future.

Merchant cash advances

A merchant cash advance (MCA) offers an advance on future sales, typically for businesses with debit or credit card sales. You get a lump sum that you can use for nearly any business purpose. MCAs tend to approve businesses with poor credit and may work well for those seeking emergency funding.

But MCAs have aggressive repayment terms, such as making loan repayments daily or weekly. Repayments are typically taken out of a percentage of your sales.

Borrowing costs for MCAs also tend to be extremely high. MCAs aren’t technically business loans, so business loan laws don’t apply. MCAs usually come with factor rates, which are calculated as decimals, like 1.10 or 1.50, and multiplied by the entire loan amount. Factor rates tend to convert into high interest rates, such as an APR of 50 percent or higher.

2. Find a lender that offers business loans without collateral

You can find business loans without collateral from traditional banks or online lenders. Traditional banks will have stricter requirements to apply, but you may be able to leverage a current relationship with the bank.

For example, you may get a business loan from the bank where you keep your business checking account. This relationship may help if your business finances are in a gray area, and you need the lender to approve you based on your character.

Online lenders tend to offer more relaxed criteria to apply, such as accepting startup businesses or borrowers with fair or bad credit. But you may pay higher interest rates than when borrowing from a traditional bank.

3. Gather your documents for a business loan with no collateral

Lenders will need to see a variety of documentation for a business loan with no collateral. This documentation will prove your ability to repay the business loan without backing it with collateral.

Expect to provide the following when applying:

• A business plan
• Business and personal bank statements
• Business and personal tax returns
• Annual revenue that meets the lenders’ minimum requirements
• Number of years in the business
• Business formation documents
• Balance sheet
• Personal financial history
• Personal contact information
• Social Security number
• A loan proposal (SBA requirement)
• A list of business debts and financial obligations

If you’re a registered business and have already built your business credit score, the lender may assess your creditworthiness using that score. However, many lenders also look at your personal credit score. You’ll want to check your personal and business credit score to see what you’ll qualify for.

4. Be prepared to provide a personal guarantee

Without assets to secure the loan, an unsecured loan puts the lender at greater risk of losing money if you default.

To offset that risk, lenders may require you to sign a personal guarantee. This is a statement guaranteeing the loan with your personal assets. If you default on the loan, the lender can go after your personal assets for repayment, such as your savings, investments or home.

Forming an LLC or corporation would usually provide some protection against the lender seizing personal assets. But the personal guarantee effectively voids that protection, allowing the lender to pass the liability onto you personally.

The lender may also require a blanket Uniform Commercial Code (UCC) lien to be applied to your loan. This blanket lien secures the loan broadly with all business assets, rather than securing it with a specific asset named in the loan agreement.

Requirements for business loans without collateral

Without collateral, lenders may tighten requirements to apply, including:

• Minimum time in business: Most lenders will want to see that you have at least two years in business. Some online lenders may accept less, such as six months to a year.
• Personal credit score: You will need a strong personal credit score of at least 670 for the best chance of approval. Some lenders approve 600 credit scores, and a few go as low as 500, though loan amounts may be limited.
• Annual revenue: Lenders will want to see strong annual revenue, usually with a minimum of $100,000 to $250,000. Bank lenders tend to have higher requirements than online lenders.
• Down payment: Since you’re not putting up any collateral, expect the lender to want a down payment of at least 10 percent or higher.
• Personal guarantee: This statement guarantees that you can repay the loan from personal assets if necessary.
• Other business debts: Lenders will look at your other debt obligations compared to your revenue. They often want to see a debt-to-income ratio of 36 percent or lower and a debt service coverage ratio of 1.25 or higher.

Alternative financing options

You may determine that you need a secured business loan, or perhaps you were denied a business loan without collateral. Consider these types of secured business loans for a better chance of getting approved.

Equipment financing

If you need equipment for your business, an equipment loan may be the best option. Equipment loans essentially come with built-in collateral since they secure the loan with the equipment being purchased.

For example, if you’re getting semi-truck financing, the lender will use the semi truck as collateral. If you default on the loan, the lender can take the semi truck and use it to repay the loan.

These loans typically provide favorable interest rates and repayment terms. You may even be able to get an equipment loan without a down payment.

Inventory financing

Inventory financing works well if you need short-term financing to fund purchasing inventory for your business. The inventory can be manufacturing supplies used to produce new products or inventory that you sell in your retail or wholesale store.

The inventory acts as collateral, negating the need for other business or personal securities to back the loan. But interest rates can be high, especially if you have bad credit or have a limited business history.

Invoice factoring or financing

Other types of loans with built-in collateral are invoice financing or factoring. Invoice financing uses outstanding invoices from your clients as collateral for the loan. The financing company advances you a portion of the unpaid invoices so that you can use the cash for expenses. You then repay the company when invoices are paid, minus fees.

With invoice factoring, you still secure the loan with outstanding invoices. But you also sell the invoices to the factoring company. The factoring company then gives you an advance and collects the invoices for you. Once clients pay the invoices, the factoring company takes out its fees and pays you the rest.

These lending options work well if you need to cover cash flow gaps while waiting for clients to pay invoices. It also works well for bad credit borrowers since the financing company considers the clients’ creditworthiness above the credit profile of your business. Fees for these types of loans can be high, though, and they may increase the longer the invoices go unpaid.

Bottom line

Getting a business loan without collateral allows businesses with few assets to receive financing. However, most lenders tighten lending requirements for unsecured loans. They may also charge higher interest rates to help them offset the risk of lending to you.

You can find no collateral business loans from both traditional banks and online lenders. Banks and SBA lenders tend to tighten requirements for unsecured loans, potentially requiring more annual revenue and a higher credit score to qualify. You’re more likely to receive a fast business loan and relaxed requirements to apply if you choose an online lender.

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 $50,000 in a 7(a) business loan without collateral. If you want to apply for more than $50,000, 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?

  To start a business without money or collateral, you can start by looking into alternative financing options. Many startups use personal savings to get started, or you could look into crowdfunding, business grants or borrowing from friends and family. You could also look into getting a startup business loan, although you need a solid plan to repay the loan from expected revenue.

• 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.