Business Loans with No Collateral
When a small business owner needs access to capital, most go straight to a bank. Only to discover that without a perfect credit score and long business history it can be difficult to get approved for a business loan. Or, the bank requests collateral the business owner is unwilling or unable to pledge.
There are other options available to small business owners which do not require collateral, but you need to know where to look. Shield Funding has been helping small business owners get access to unsecured business loans that do not require any collateral. The process is fast and easy and you can apply online for free. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What is Collateral?
Collateral is a tangible asset which the bank could seize if you defaulted on the loan. It could be a building, a piece of machinery, or your past due receivables. When you pledge it to secure a loan the lender now has a right to that asset. Should you default on the loan, the asset could be seized and sold to cover your debt.
This could represent a huge risk to your business’s ability to continue operating. Equipment financing loans are an example of a loan that is secured by collateral. If you lose an important piece of machinery it could put you out of business.
Invoice factoring is another type, where your past due invoices are pledged to the lender. Losing control of your invoices could mean that those customer relationships are damaged when a third party collects. Loans secured by collateral often represent less risk to the lender and more risk to the borrower.
Pledging collateral can also add significant time to the loan approval process. The bank may want to audit your collateral, such as invoices due, or have it appraised. They could arrive on a lower value for that collateral and then require you to pledge more to get the loan. The loan underwriting and approval could take months.
These drawbacks to pledging collateral for a loan are why many small business owners prefer to simply skip this step, even if they do have collateral to pledge.
Business Loans Without Collateral
A lender bases the interest rate they charge you on their perceived risk and profit margin. Loans that are secured by collateral represent less risk, as the asset can be used to settle the debt. If you take out a business loan that does not require collateral, plan on paying a higher interest rate.
The difference in what you would pay for interest with and without collateral should represent value to you. Do you care more about retaining control of your asset than you do about paying 2-3% more in interest on a loan? If you are confident in your ability to repay the loan over its term then here are some options for business loans which do not require collateral.
UCC Liens and Loans
Before delving into the types of business loans which do not ask for collateral, you should be aware of something called a Uniform Commercial Code or UCC Lien. A UCC lien is a blanket lien that a lender may file with the secretary of state against your businesses assets when you take out a loan with them. It does not apply to a specific asset but rather your business’s total assets.
Many lenders file these liens when you borrow from them. They are a matter of public record and are industry standard in many cases. If you already have a UCC lien against your business if another lender gave you a loan they would be in the second position. Most lenders are unwilling to take a second position and risk not being able to collect on their loan.
It is never a good idea to take out a loan if you are unsure of your ability to pay it back. Even if not required to make a specific collateral pledge, the lender will find a way to collect their money.
The Small Business Administration, or SBA, guarantees small business loans through partner banks. You do not borrow directly from the government; rather they guarantee a portion of your loan to the lender. Lenders are willing to take on more risk with these loans due to this guarantee.
An SBA 7(a) loan does not ask you to pledge collateral, unlike other SBA loans. It can, however, be difficult to qualify for one. Borrowers must have a credit score above 620. If they need to borrow more than $25,000 the SBA requires collateral at that point. While these loans can have varying terms, due to their excellent interest rates there is a lot of competition for them.
Bad Credit Business Loans
Alternative lenders such as Shield Funding offer bad credit business loans for those unable to qualify for a loan at a traditional lender. While they are called “bad credit,” this does not necessarily mean that borrowers have a low credit score. Sometimes it could simply mean that they have not been in business long enough for a bank to consider lending to them.
A bad credit business loan requires no collateral; instead, the lender looks at your monthly revenues when making the decision to lend. To qualify, you must have a minimum credit score of 500 and monthly revenues of $8,000. The loan’s term will be anywhere from two to eighteen months.
If your business cash flows well a bad credit business loan could be an excellent option. Loans can be approved in as little as 24 hours and the funds could be in your bank account within days. Interest rates range from 12 to 45%.
Business Credit Cards
It is not uncommon for start-ups and small business owners to finance their company with business credit cards. They require no collateral or personal guarantees to open, and you can usually apply online in a matter of minutes. Used properly, they have helped many small business owners successfully grow their business and manage cash flow.
Look for a business credit card with a 0% introductory APR. Once the introductory period expires, the interest rate will rise to anywhere between 12-25% and you will likely pay an annual fee. Most credit cards have a grace period during which anything you have charged is not subject to interest. If you plan your purchases carefully, you can pay them off in full before the grace period expires and never incur interest.
While it is easy to qualify for a business credit card and lenders do not ask for collateral, you must manage this type of credit wisely or you will wind up paying significant interest fees.
Unsecured Business Loans
An unsecured business loan is a term loan that is granted without pledging collateral, though you may be asked to give a personal guarantee. They are usually granted for shorter terms of two months to three years. Again, because these loans are unsecured you will pay between 9 to 45% interest.
To qualify for an unsecured business loan you must have been in business for one year and have monthly revenues of $10,000. The loan amount can be for $5,000 up to $1 million. With a shorter term and higher interest, you will have higher monthly payments.
These loans are easy to obtain and have a fast turnaround time.
Merchant Cash Advances
A merchant cash advance or MCA falls into a gray area of no-collateral loans. While you are not pledging current assets, you are pledging a percentage of your future credit card sales to repay the loan.
The lender analyzes your past few months of credit card receipts to determine an average. They lend on what they predict your credit card sales will be over a future time period. Then, every time you swipe a credit card they take a percentage which includes both their principal and interest.
This type of collateral can become quite expensive, as some lenders will raise your interest rate over the life of the loan if it is taking too long for them to be repaid. Interest rates can get into the double or triple digits. Make sure that their deductions will not harm your business’s cash flow in the future before taking out an MCA.
Business Line of Credit
A business line of credit is an unsecured line that can be drawn upon at any time. If applying for one at a bank, they prefer if you have your business checking accounts with them as well.
Similar to a credit card, a line of credit is a revolving source of funds that you can draw on at any time, pay down, and then borrow against again. There will be a maximum limit on what you can borrow and you could have to pay an annual fee to keep it open. But you only pay interest if you have drawn against the line.
Because a business line of credit is unsecured the lender could require that you have a higher credit score to qualify, or they might charge extremely high interest to offset their risk.
The Final Word on Unsecured Business Loans
In order for a business loan to help and not hurt your business, you must borrow responsibly. Prepare a detailed budget that includes your future loan payments and calculate a debt service ratio to make sure that you can afford the loan.
Have a clear plan for what you intend to do with the money, and stick to it. Spending the money on other expenses could lead to a lower return on your investment than you had planned. Carefully track how you spend the funds you receive.
You do not want to take out a loan as a Band-Aid on a business that is failing. Instead, borrow to help with cash flow management or to seize a growth opportunity. Include the loan in your business plan and see how it changes your company’s future.
An unsecured small business loan can be the right choice for your business if you know what you are doing. If you think you are ready to borrow, contact Shield today to find out more.