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Four Steps to Getting a Small Business Loan Without Collateral

The loan is available, however loan conditions and approval requirements vary widely

By Richard Best

Updated November 30 2022

Reviewed by Margaret James

If you’re in need of a small-business loan–either to fund your next stage of growth or to keep your business on solid ground in the event of an unexpected crisis, one thing to consider is whether you’ll need to provide collateral to the table.

Collateral is a form of an insurance policy to the loaner in case you default on the loan and are unable to repay it for any reason. If your business is short on assets that could be used as security and you are looking for a non-collateral business loan could be your top priority.

Fortunately, it’s possible to get business loans that do not require collateral as a requirement to be approved. Before you apply in for any of the loans it is essential to conduct your own research to know what you can be expecting.

Important Takeaways

It’s possible to find unsecured small business loans by contacting the Small Business Administration and online lenders.

However, this doesn’t mean you’re not required to accept some form of personal financial responsibility in relation to business loans.

Peer-to peer lending is another option to pursue business loans without collateral requirements.

Lenders might charge higher fees or interest rates for no-collateral business loans.

1. Be aware of your options when it comes to no-collateral Business loans

The first step to get a business loan requiring no collateral is to understand what options are available. Non-collateral loans are offered by several lenders, but loan terms and approval requirements could be quite different.

SBA 7(a) Loans

It is the Small Business Administration (SBA) offers loans to small-business owners via its network of lenders. There are many SBA loan programs to think about when you require working capital including one of them, the 7(a) program being among the most well-known. This SBA 7(a) programme does not have to require collateral in loans of up to $25,000, which can be beneficial for those who only want to borrow a smaller amount of money.1

For loans that exceed $350,000, the SBA obliges lenders to make collateral loans to the greatest extent feasible, which is in excess of the loan amount. If you don’t have enough business assets to fully secure the loan the lenders may make use of the real estate that you have as collateral. However, having no collateral whatsoever isn’t an obstacle to getting the 7(a) loan if you have the other requirements.1

SBA Disaster Loans

In addition to 7(a) loans, the SBA offers disaster relief loans for businesses that experience losses resulting from natural disasters as well as economic turmoil. For instance the business that has suffered losses due to a federal order to shut down may be eligible for an economic injury loan.

The down payment for an SBA loan can range from 10 to 30%, however it will be contingent 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 will not deny you a loan because of the absence of collateral alone.3

Small Business loans that are online and other alternatives. Loans

Online and alternative lenders can offer a variety of loans without collateral requirements to to meet your business’s working capital needs. The kinds of loans you could be eligible for without having to provide collateral up front are:

Term The loan

Invoice Financing (also known as “accounts receivable financing”)

Inventory Financing

Merchant Cash Advance

Equipment Financing

Purchase Order Financing

Line of Credit

With these types of small-business loans it is possible that there is certain types of security that are required however it’s not cash or any other physical object you must offer. For instance, with the financing of invoices, you’re leveraging your invoices that are due to be paid to get money.

With a cash advance for merchants is a loan against the amount of your future credit card transactions. In the case of loaning equipment to finance, then the item you lease or purchase is used as collateral to the loan.

Peer-to-peer lending is a different option for small-business financing that does not require collateral. These lending services connect potential investors with small-business owners in need of loans. Investors pool their funds to finance the loan, and owners pay it back just like any other loan and with interest. These loans are unsecured, meaning they don’t require collateral.

2. Examine Your Financials for Your Business to Determine Whether You Qualify

Some types of no-collateral small-business financing may be more difficult to get than others. If you’re applying for one type of SBA 7(a) loan, for instance, you have to have at least two years of operational history in your resume, be in compliance with the SBA’s definition of an eligible small business, and have an acceptable credit score as well as the revenues SBA lenders are looking for. The SBA also demands that you have exhausted all other borrowing options before submitting an application for an SBA 7(a) loan.4

With online and alternative lenders On the other hand the requirements are more fluid. For instance, a low credit score isn’t an obstacle to getting a merchant cash advance as well as invoice finance. And it may be easier to get startup loans via online lenders or other lenders which only require six months of operational history.

The next step to get a business loan without collateral requirements is evaluating your company’s financial standing and its overall financial position. This means that you must do things such as:

Checking your personal and business credit scores

Updating your balance sheet

The creation of key financial documents, like a profit and loss statement, as well as the cash flow statement

Examining your business’s expenses and overall cash flow

The purpose is twofold: to determine your creditworthiness for a loan and to assess your capacity to repay it. Inability to pay back the loan can affect your credit score which makes it more difficult to obtain any type of loan in the future.

Some types of no-collateral loans–such as a merchant cash advance or invoice financing–rely on factors rather than an interest rate in determining the amount of borrowing. Based on the terms of financing and how quickly it’s repaid the factor rate could easily be converted into an inverse or three-digit effective APR.

3. Make sure you are prepared for a personal Garanty or UCC Lien in lieu

While you may be qualified for a modest business loan without the need to provide collateral, it doesn’t mean the lender won’t request additional conditions. Specifically, you may be asked to sign a personal guarantee or sign the Uniform Commercial Code (UCC) lien.

The term “personal guarantee” is exactly what it sounds like: an agreement that you’ll personally pay off the debt that your company has taken on. Personal guarantees are often an essential requirement for non-collateral loans and small-business credit cards. As the lender has no collateral it can attach in the event of a default the loan, it has the right to sue you to collect an unpaid debt.

An Uniform Commercial Code lien may be a little different. It’s essentially a blanket lien that allows a lender to attach all or any of your business property in the case you default on a loan. In other words, even if you did not offer any collateral on the table in order to obtain the loan in the first place, an UCC lien would give the lender the option to attach assets in the event that you fail to pay.5

4. Take note of the terms and conditions carefully prior to signing

If you’ve submitted an application to a business loan with no collateral and been approved, the final step is to be aware of the loan terms and conditions. When reading the loan contract, be sure to pay attention at the rate of interest, annual percentage rate (APR) and the payment schedule, as well as the loan duration.

You must know the length of time it will take to pay the loan off and what your overall cost will amount to when costs and interest are factored in.

Speaking of fees, check for the fees you’re being charged. It could comprise an loan origination fee or a prepayment penalty. When your financial situation allows you to pay off the loan earlier, you do not need to pay a penalty to do it.

Consider whether personal guarantees or a UCC obligation is needed in the agreement to borrow. While you may be in the best of moods to repay the loan however, you must be aware of how these obligations could impact your business in the event that you’re unable to hold up your commitments for any reason.

Is It Hard to Get a Small Business A Loan?

It isn’t easy to obtain a small-business loan without a strong personal credit score and evidence of regular income from your business. In the absence of these requirements, the risk of making the loan is high for lenders. In the event of a wide range of factors, loan offers may require collateral or high rates of interest if the bank finds the profile of an applicant to be not to be solid. The requirements can strain the business. If you feel you have a poor credit history or your company’s profits aren’t enough and you are looking for funding through other sources, such as cash from family and friends or crowdsourcing could be the best option.

Do SBA loans require a down Payment?

It is true that SBA loans do require an initial down payment. The amount of the down payment can vary dependent on the particular loan and borrower, however the most common down payment of 10%. The amount may vary, and can even reach 30% in some cases.2

Can You Use SBA Loans for Personal Use?

SBA loans are not permitted to be used for personal purposes. The money can only be used to fund your business. This includes paying for expenses for your business as well as expanding your business and salaries, such as your own. SBA loans are not able to be used to settle your personal debt, such as your mortgage or personal credit card debts.

The Bottom Line

The process of obtaining a loan for your company can be a challenge, especially if you are required to put collateral on the line, increasing the chance of being a victim. The Small Business Administration (SBA) is an excellent resource for business owners . It offers financing options without the need for collateral.

Other than the SBA Businesses are able to obtain loans that don’t require collateral but it is important to know the terms prior to signing the contract. The loans without collateral could have other strict terms or high interest rates. If you are deciding to take out a loan be sure to determine the conditions that will be most suitable for your needs and your business.


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