Getting a business loan without having to provide collateral can open many doors for entrepreneurs and small business owners. However, obtaining unsecured financing often comes with greater challenges compared to securing a loan with collateral like real estate or equipment.
What is Collateral, and Why Do Lenders Typically Require It?
Before diving into collateral-free options, it’s important to understand the typical role of collateral in traditional business loans. Collateral refers to an asset that is pledged as security against the loan. If the borrower defaults on payments, the lender has the right to seize the collateral to recover their losses.
For business loans, common types of collateral include:
- Commercial real estate
- Equipment, machinery, vehicles
- Inventory
- Accounts receivable
By requiring collateral, lenders mitigate their risk exposure. If the business fails to repay the debt, the lender can liquidate the pledged asset to recoup at least part of what’s owed. This provides an extra layer of protection for the lender compared to an unsecured loan, where they have no assets to seize in the event of default.
As a result, most conventional business loans through banks and other traditional sources will expect the applicant to pledge qualifying collateral upfront. But for entrepreneurs just starting out or those with minimal fixed assets, this can be a major roadblock to accessing much-needed financing.
Alternative Options Without Collateral Requirements
Fortunately, there are growing alternatives for obtaining business loans without having to provide collateral as security. Let’s examine some of the most common options entrepreneurs should consider:
SBA Small Business Loans
The U.S. Small Business Administration (SBA) offers various loan programs designed to facilitate access to capital for small businesses that may not qualify for conventional loans. Notable SBA loan products that do not require collateral include:
SBA Microloans: Provides loans up to $50,000 to small businesses and certain nonprofit childcare centers. The maximum term is six years.
SBA Community Advantage Loans: These are targeted to businesses located in underserved communities and run by applicants with low personal net worth. The maximum loan amount is $250,000.
SBA Express Loans: Up to $350,000 for working capital or real estate, equipment, supplies, or inventory. Streamlined application process.
SBA loans are delivered through participating banks and nonprofit lenders. The SBA guarantees a percentage (typically 75-85%) of the loan, reducing risk for the lending partner. This enables more flexible underwriting compared to standard bank loans.
Online Alternative Lenders
As online lending has boomed in recent years, many fintech companies now specialize in offering small business loans without requiring traditional collateral. Major players to research include:
- OnDeck: Provides lines of credit and term loans up to $500,000 based on business financials and creditworthiness of owner(s).
- Kabbage: Offers working capital loans up to $250,000 using real-time data integrations to automated lending decisions.
- Fundbox: Specializes in supply chain financing, advancing funds against unpaid invoices. Loan amounts vary based on invoice volumes.
- Lendio: Marketplace that facilitates loan applications from multiple alternative lenders at once for comparison.
Online lenders typically underwrite based on personal credit history, business financials like receivables and bank statements, and sometimes online sales data. Funding can be obtained in as little as a few business days.
Merchant Cash Advance
A merchant cash advance (MCA) provides an immediate infusion of non-collateralized working capital in exchange for a percentage of future credit/debit card sales until the advance is repaid, usually over 3-12 months.
MCA amounts range from $5,000 to $1 million based on average monthly card volumes. Repayments are deducted daily from receivables via ACH until the advance plus fees are settled. Interest rates average 30-50%, but repayment is not tied to a set term.
MCAs offer fast funding for established businesses needing short-term cash flow boosts, but high costs make them best suited for urgent situations rather than long-term financing needs. Carefully review terms to avoid unplanned extensions.
Business Line of Credit
Business lines of credit function similarly to personal credit cards, offering a revolving pool of funds that can be drawn against as needed. Credit limits range from $25,000 to $500,000 based on creditworthiness.
Like personal credit cards, business credit lines report monthly payments to the major credit bureaus, helping to build business credit history over time. Capital can be accessed for operating costs, inventory purchases, or unexpected expenses.
While major banks may require collateral to secure larger lines of credit, online lenders are more likely to approve smaller credit lines of $50,000 or less without collateral based solely on business financials and owner credit profiles.
Equipment Financing
Equipment loans and leases enable funding equipment purchases or upgrades without depleting capital reserves. Many equipment financiers, lessors, and independent installment lenders approve term loans up to $150,000 based on the equipment value as an integral part of the loan underwriting process rather than strictly relying on collateral.
With competitive rates and flexible terms usually ranging from 1-5 years, equipment financing provides a low-risk way to invest in assets like machinery, vehicles, computers, and more that directly boost operational efficiencies and growth potential. Just ensure equipment costs and loan terms align with return on investment projections.
Industry-Specific Financing
Certain industries have financing tailored to their particular needs that may not require conventional collateral. For example:
- Agriculture Loans – Funds farm operations and infrastructure through the USDA Farm Service Agency
- Trucking Loans – Finances truck/trailer purchases through third-party captive finance firms
- Franchise Loans – Supports new franchisees with working capital and equipment through brand-approved sources
Research industry associations and regulatory bodies to identify specialized lending channels designed for your business sector. Terms tend to be competitive, with built-in risk mitigation measures suited to each niche.
Making the Most of Collateral-Free Options
While the above alternatives expand access to capital without real estate or equipment collateral, underwriting criteria still apply that determine your likelihood of approval and rates obtainable. Here are some best practices:
Build Proper Financial Documentation
Lenders, whether banks, online firms, or specialty sources, will need to review income statements, balance sheets, cash flow projections, and tax returns to assess viability. Maintain organized bookkeeping from startup.
Boost Personal and Business Credit Profiles
While collateral isn’t mandatory, strong FICO scores (680+) and payment histories significantly aid approval odds when personal guarantees are involved. Use credit responsibly and on time to maximize profiles over 6-12 months before applying.
Demonstrate Revenue Growth or Stability
Lenders want to see consistent sales that cover regular loan payments. Highlight consistent monthly revenues and conservative growth projections backed by sales pipeline data for startups or seasonal fluctuations for others.
Provide Proper Collateral Alternatives
While real estate may be unavailable, consider using major business assets that are not fully depreciated as loan support if possible. Inventory, equipment, and accounts receivable are options versus strictly “no collateral” if it strengthens underwriting opinion.
Cultivate Strong Banking Relationships
Establish a business checking account, process recurring revenues through the bank, and become known by a personal banker. This “character” lends confidence for optional collateral-free approvals down the road, especially with community banks or credit unions.
Leverage Guarantee Programs
The SBA, local economic development groups, and some online lenders offer partial or full loan guarantees as a substitute for hard collateral when you meet eligibility criteria. Guarantees make approvals far smoother for alternative lenders.
Frequently Asked Questions
Here are answers to some common questions about obtaining collateral-free business loans:
How do I build my credit if I’m just starting a business?
When first establishing business credit histories, apply for secured credit cards reporting to Dun & Bradstreet or Experian that you can build payment histories on responsibly over 6-12 months. You can also seek consignment lines for inventory that report.
What are the interest rates on unsecured business loans?
Interest rates on collateral-free loans vary widely based on loan type, term length, and credit quality. SBA-backed loans average 5-8%, online lenders 7-15%, merchant cash advances 20-50%, and lines of credit 8-18%. Equipment financing is usually lowest at 4-8% for new businesses.
Is a personal guarantee required for an unsecured business loan?
For most small business loans that don’t require collateral, the lender will require the business owner(s) to provide a personal guarantee. This legally binds the owner(s) to repay the debt should the business default. Lenders see this as additional security since it allows them to collect from the owner’s personal assets if needed.
What are the underwriting factors lenders consider for an unsecured loan?
Lenders evaluate several risk factors when underwriting an unsecured business loan application. The most important include: personal and business credit scores/histories, cash flow projections based on financial statements, time the business has been operating, income/revenue trends, owner experience, debt-to-income ratios, intended loan purpose, and overall likelihood of being repaid based on the business plan. Having stronger numbers in each area increases approval odds.
