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Starting a business can seem like a bit of a catch-22 situation. Often lenders won’t give you a business loan unless you can offer collateral—an asset that it can repossess if you default. However, with high startup costs, entrepreneurs typically need financing to get off the ground.
This is when business loans that require no collateral come in handy. While it’s easier to get one as an established business, it’s not impossible. If you spend a bit of extra time to make and execute a plan, you’ll likely be able to get the funding you need.
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What Are Business Loans With No Collateral?
Convincing a lender to give you money for a business venture is difficult. Most of the time, they want to see a demonstrated history of success with strong and consistent income. You’re a riskier applicant without that.
Lenders sometimes require collateral to reduce the risk of a loan transaction. This means that if you default, they can seize the collateral—whether it’s a bank account, business inventory, real estate, etc.—to recoup their losses.
But with an unsecured business loan, you can get financing that requires no collateral. But keep in mind that because no business assets back the loan, lenders typically have more stringent qualification requirements and will impose a personal guarantee.
How Do Business Loans With No Collateral Work?
Business loans with no collateral help companies make large purchases and cover the cost of doing business. Funds are generally disbursed as a lump sum that can be used to make a specific purchase or manage cash flow and is then repaid with interest. However, there are other types of small business loans—like lines of credit, merchant cash advances and invoice financing—that can be used to access cash more quickly and on an as-needed basis.
Personal Guarantee Requirement
If you’re applying for a business loan with no collateral, you’ll generally be expected to sign a personal guarantee for the loan. This isn’t quite the same as pledging property for a secured loan, but if you default, the lender can come after your personal assets to cover what you owe.
Startup Business Loan Options With No Collateral
If you’re starting a new business from scratch, you’ll probably need a chunk of money. Here are some of your options for business loans with no collateral:
SBA Loans Under $25,000
If you only need a small amount of startup funds and aren’t in a rush, a U.S. Small Business Administration (SBA) loan for under $25,000 may be a viable option.
These kinds of loans generally offer the most business-friendly terms, with lower rates compared to other loan options. That’s because a portion is guaranteed by the SBA, so if you default, the lender may be able to recoup some of their losses directly from the government.
SBA loans come in all shapes and sizes. For large loans, collateral is usually required. But if you’re applying for a standard SBA 7(a) business loan, you likely won’t have to provide collateral for loan amounts under $25,000. You and any other owners with at least a 20% stake in the business will be required to personally guarantee the loan, however. This means you legally agree to repay what you borrowed with personal assets if the business fails to do so.
Online Startup Loans
Traditional finance institutions may not be so kind to business startups, but that doesn’t mean other lenders aren’t. It’s relatively easy to find loans geared specifically at new startups, often from smaller online lenders. Like other forms of alternative small business financing, online startup loans tend to be on the expensive side, so you’ll need to consider this carefully in your business plan.
Merchant Cash Advances
When you take out a merchant cash advance (MCA), you’ll get paid a lump sum upfront, just like with a loan.
However, rather than paying it back in steady payments over time with interest, you’ll agree to a factor rate that sets the total amount you pay for the loan in advance. You then repay it as a percentage of your credit card transactions—this is known as a holdback percentage. These payments are generally made much more frequently—sometimes even on a daily basis—than with a typical loan, and you’ll continue making them until your advance amount is fully repaid.
For example, if you borrow $10,000 with a factor rate of 1.25, you’ll pay the lender back a grand total of $12,500 ($10,000 x 1.25). If you agree to a holdback percentage of 10%, you’ll pay your lender 10% of all of your daily sales until you’ve repaid the full amount (the $10,000 you borrowed, plus the $2,500 finance charge).
Because your payment amount scales according to your sales, it’s a particularly good option for businesses with seasonal fluctuations in income or new startups that can’t commit to a certain monthly payment amount. However, since there’s no defined term length, you can’t easily calculate an equivalent annual percentage rate (APR) and compare it with other lending options. Typically, though, they’re more expensive than standard business loans.
Alternatives to Business Loans With No Collateral
Many businesses need multiple sources of financial support to get off the ground. You may have to cobble together several types of startup funding. Here are a few other ideas:
Equipment financing is similar to how auto financing works. When you take out a car loan, it’s secured by the car you’re buying, meaning you don’t need to have collateral in hand before you get the loan. Similarly, many small business lenders offer secured loans in the form of equipment financing, with the equipment you’re buying acting as the collateral for the loan.
While this type of loan won’t necessarily solve your needs for a storefront, business inventory or workforce, it can be a good option if you need equipment to get off the ground.
If you have a strong social network, another option to consider is crowdsourcing to raise the funds you need to start your business. This obviously won’t work for everyone; you wouldn’t expect to start a new biomedical company by setting up a fundraiser on Kickstarter, for example. But if your business is relatively small, it could be a good choice.
Many people also use their own personal savings to help start their businesses. It can be tempting to raid your emergency and/or retirement savings because these are probably the largest buckets available to you; however, think long and hard before you do. Make sure you have a plan in place for what to do if you lose that money.
It’s also a good idea to work with an experienced small business accountant who can help advise you on the most tax-efficient business setup and how to write off your personal investments into the business.
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