When your small business takes out a loan, how does the lender know you’re going to pay it back? One way is by providing the lender with business collateral.
Collateral is an asset of value that, should you fail to repay the loan, the lender can seize (and sell) to recoup their losses. When you put up collateral, the bank or lender you’re working with sees you as less of a risk when it comes to paying back the loan.
Not all loans require collateral, however. Read on to learn why that is, what situations might require you to provide collateral, and how to get a small business loan without collateral, if you qualify.
Key Points
• A business loan that does not require collateral is called an unsecured business loan.
• To get a business loan without collateral, look for lenders that offer unsecured business lines of credit, credit cards, or microloans, which don’t require collateral.
• A good personal or business credit score increases your chances of approval, as lenders assess your creditworthiness.
• Demonstrating strong and consistent cash flow reassures lenders that your business can repay the loan, even without collateral.
• A well-prepared business plan showcasing growth potential, revenue forecasts, and how you will use the funds strengthens your loan application.
How Do Traditional Loans With Collateral Work?
No matter where you apply for a small business loan, the lender will look at how much risk you present.
One indicator of that level of risk is your credit score. If your business or personal scores are low, it indicates that you may not always have been financially responsible in the past. Maybe you’ve taken on more debt than you could afford, you’ve missed credit card payments, or you have a bankruptcy on your record. All of these may concern a lender, since it is primarily focused on the likelihood that you will repay the loan.
Because of that concern, some loans may be secured, meaning that they require collateral. Unsecured loans, by contrast, don’t require collateral. Collateral is typically an asset that you own. When you put it up as collateral, you are agreeing that the lender can seize it if you are unable to pay your loan. The lender can then sell this asset to cover what you owe.
Some examples of small business collateral includes:
• Heavy machinery
• Equipment
• Real estate
• Cash
• Securities (e.g., treasury bonds, stocks, or certificates of deposit)
• Inventory
• Vehicle
So, let’s say that you’re applying for a $50,000 secured loan. You might put up a piece of heavy machinery you own as collateral for the loan. If you aren’t able to fully repay the loan, your lender has the right to seize that asset to cover the balance of what you owe.
Collateral is not a commitment to take lightly. Putting up collateral like critical equipment and real estate you’ve worked hard to get could jeopardize your business. That’s why you might want to learn how to get a small business loan without collateral when it’s possible so that you don’t put your business assets at risk.
Do Small Business Loans Without Collateral Exist?
Yes, it’s possible to get a small business loan without collateral. But because the lender will face a higher risk when you don’t put up an asset to secure the loan, they will look closely at your credit scores, business history, and annual revenue to determine your creditworthiness and likelihood to repay the loan.
Also, because there is higher risk involved for the lender, loans without collateral often come with higher interest rates, shorter repayment terms, and sometimes a personal guarantee.
Recommended: What Is the Minimum Credit Score for a Business Loan?
Why Some Loans Require Collateral
A collateralized loan presents less risk for the lender, so it’s able to be competitive and possibly offer your business a lower rate.
Some lenders require collateral because they cater to people who might not qualify for other types of business financing. For businesses with poor or limited credit, an unsecured loan through a bank might not be an option, so they may need to go with lenders that have more requirements in terms of collateral.
There are also specific loan types that, by definition, require collateral, such as invoice financing and equipment loans. Invoice financing (and the related invoice factoring) uses the value of the business’s unpaid invoices as collateral, and equipment loans use the equipment you’re purchasing to secure the loan.
How Do Unsecured Business Loans Work?
If you don’t have collateral (or don’t want to put your business assets on the line), it may be possible to get an unsecured loan. In this case, the lender might use the following clauses to lessen the risk of lending you money.
Blanket Liens
As a condition of your unsecured loan, your lender may file a blanket UCC lien on your company assets. This means that, should your business default on the loan, the lender has the right to go after your assets to compensate for any amount still owed.
Thus, even if you don’t put up collateral, a blanket lien means the lender can seize assets. However, getting financing with a lien is generally a faster process than getting a secured loan.
Personal Guarantees
Without collateral, a lender may require you to sign a personal guarantee in order to get your business loan. This guarantee means that you agree to repay the loan out of your own pocket in the event that your business defaults on the loan. While you shouldn’t be afraid of signing a personal guarantee, it’s important to understand what it means before you commit to the loan.
Pros and Cons of Getting a Small Business Loan Without Collateral
Small business loans without collateral can have both benefits and drawbacks. Here’s a look at how they stack up.
| Pros of Unsecured Loans | Cons of Unsecured Loans |
|---|---|
| May have a shorter loan application process. since the lender doesn’t have to assess the asset | May have a higher interest rate than secured loans that require collateral |
| You won’t jeopardize your business as you would if you couldn’t pay the loan and your assets were seized | You may not be able to borrow as much as with a collateralized loan |
| Online lenders may have more relaxed requirements to qualify for an unsecured loan | You may have to sign a personal guarantee |
Let’s dig a little deeper into the details.
Pros of Small Business Loans Without Collateral
There’s more paperwork involved with a loan that requires collateral, plus that asset must be assessed and valued. A small business loan without collateral would typically take less time to process and, as a result, could fund faster.
Because you aren’t putting up a key asset (such as your commercial real estate or equipment) for the loan, there’s no risk that you will jeopardize your business by allowing those assets to be seized if you can’t pay the loan. (Of course, you will still have to figure out a way to pay back the loan.)
If you choose to work with an online lender, you may have better success at getting a small business loan without collateral than if you apply with a traditional bank.
Cons of Small Business Loans Without Collateral
First, these loans tend to have higher interest rates, since they represent higher risk to the lender.
Also, the value of the collateral you put up often determines how much you’re eligible for. So without that collateral, you may not be eligible to borrow as much.
A loan with no collateral may require signing a personal guarantee or agreeing to a blanket lien, so you can still end up putting assets at risk.
Recommended: Business Financial Statements
8 Types of Small Business Loans Without Collateral
Here’s a look at different types of small business financing that may not require collateral.
1. SBA loans
Small Business Administration (SBA) loans are often considered the gold standard for business loans because they typically offer the largest amounts and lowest rates. And, since these loans are backed by the government, they can be easier to qualify for than other types of business loans.
Some SBA loans require collateral, whereas others do not. It’s often left to the discretion of the SBA lender to determine whether collateral is required, based on the qualifications of the borrower. However, with the 7(a) program, no collateral is required for loans up to $50,000.
2. Long-Term Loans
Long-term business loans are lump sums of capital paid back over a set period of time — typically from three to 10 years. Banks and credit unions may choose to require collateral for long-term business loans at their discretion. With unsecured loans, however, you may need to provide a personal guarantee, which means that if your business can’t pay back the loan, you personally will have to.
3. Merchant Cash Advance
Another no-collateral business loan option is a merchant cash advance. With a merchant cash advance, you’re borrowing against future credit card sales. You pay back the advance (plus a fee) by having a certain portion of your daily or weekly debit and credit card sales automatically withdrawn from your business bank account.
4. Online Loans
If you get a business loan from an online lender, you may not need to supply collateral. Instead, an online lender might require a personal guarantee or, possibly, a blanket lien to reduce its risk. However, online business loans tend to charge higher interest rates and offer less favorable loan terms than traditional banks.
5. Business Credit Cards
While a business credit card is not exactly a loan, it can serve as a source of no-collateral funding for your business. This is especially true if you are able to get a 0% introductory annual percentage rate (APR) business card.
These intro deals often last as long as 12 to 18 months, which could allow you to charge expenses up front, then pay them off interest-free. Just keep in mind that, once the promotional period expires, you may end up paying high interest and fees.
6. Business Lines of Credit
While banks often require collateral for a business line of credit, you may be able to find an unsecured business line of credit from an online or alternative lender.
Secured or unsecured, a business line of credit can be a flexible source of funding for newer businesses with limited credit history. You can borrow what you need up to a certain limit. As you pay off the amount you owe, it’s freed up for you to use again when you need it.
7. Equipment Financing
Equipment financing can be helpful for new businesses that need funding to purchase expensive equipment but can’t (or don’t want to) use other assets for collateral. With an equipment loan, the item you are purchasing acts as collateral. If you default on your loan, the lender will simply seize the equipment to recoup their losses. Your personal and business assets stay safe.
8. Invoice Financing
Invoice financing (also known as accounts receivable financing) is a cash advance you can get on your outstanding customer invoices. With invoice financing, your invoices serve as collateral, so you don’t have to put any additional assets on the line.
With this type of financing, an invoice financing company advances you a certain percentage of your outstanding invoices. They hold onto the remaining percentage and charge fees for each week it takes for your customers to pay up. Once your customer has paid in full, you’ll get the reserve amount back, minus the lender’s fees.
How to Qualify for Business Loans Without Collateral
If you’d prefer to avoid the hassle of collateral — or don’t have enough assets to offer as collateral for the amount of money you need — you still have financing options.
You may be able to get an unsecured business loan from an alternative lender. These lenders may also offer a faster, larger loan than a traditional lender could offer with a secured loan. However, they tend to come with higher interest rates and shorter terms because they’re less secured.
To qualify for a business loan without collateral, focus on building a strong credit score, as lenders will heavily weigh your personal and business credit history. Make sure to demonstrate consistent cash flow and solid financial performance, as that shows your business can meet repayment obligations. And finally, prepare a comprehensive business plan that outlines your company’s growth potential, revenue projections, and loan usage, which can improve your credibility.
Recommended: 6 Step Guide to Getting a Small Business Loan
The Takeaway
To get a small business loan without collateral, apply for unsecured loans, such as business credit cards, lines of credit, or SBA microloans. Lenders may focus on your credit score, cash flow, and business performance. Building a strong business plan and financial history improves approval chances.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Do startup business loans with no collateral exist?
Yes. While most business loans will require collateral to secure the loan, there are some startup business financing options you may be able to get without collateral. These include some SBA loans, unsecured lines of credit, short-term loans from online lenders, merchant cash advances, and business credit cards.
What is collateral?
Collateral refers to an asset that you put up to secure a loan. Should you be unable to pay back your loan in full, the lender can take your collateral to cover the debt.
How do traditional secured loans work?
By providing an asset, you lower the amount of risk you present to the lender. The lender can take your collateral if you can’t pay the loan.
Can you get a small business loan without collateral?
Yes, there are business loans that do not require collateral. They’re called unsecured loans, and they typically require solid credit scores and annual revenues to qualify for the best rates.
How hard is it to get a loan without collateral?
It depends on your qualifications. If you have a solid business history, steady revenue, and good credit scores, you may qualify for an unsecured loan.
What kinds of loans can you get without collateral?
There are a variety of small business loans and lines of credit you can get that don’t require collateral. Such funding includes SBA loans, long-term loans, lines of credit, and merchant cash advances.
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