Broadly, there are two types of loans: secured and unsecured. There are dozens of types of loans depending on their nature, purpose, applicability, loan amount, interest and terms but they can all be classified as either secured or unsecured. Secured loans require collateral. It is a tangible asset that acts as the security. Unsecured loans don’t need such collateral or any security.
Now, there are small business loans that can be obtained with no collateral and there are many that need some kind of security. If you want to buy an existing business, learn more about business acquisitions here. Let us consider the options at your disposal and which ones will be available with no collateral.
SBA loans or loans that are backed by the Small Business Administration, a federal agency, do not typically need collateral. Even startups can get business loans without collateral through the SBA. Technically, banks or lenders will not decline your business loan application if you have no collateral. However, there has to be some kind of security. You may extend a personal guarantee. There could be some assets, whatever form and shape, which may have some tangible value and that can be attached to the loan as security.
READ: List of requirements for SBA 7(a) loans
Loans Without Collateral
In case of microloans or loan guarantee program which is the 7a term loans, we can show how you can get approved to get a small business loan without collateral. Unsecured business loans are rare but possible through the SBA. In case of disaster recovery loans, the damaged property or asset will be used as collateral. In fixed asset loans backed by the SBA, the procurement itself is a form of security considered by the lenders.
Business Financing Advice
The advisors at Key Commercial Capital can assist you in understanding what options you have based on your situation. There is no cost for an initial evaluation. Read what our clients have to say about their experience on Google. Call 833-444-4KEY or get started by completing our pre-qualification form.
Startup business loans, No collateral!
ROBS 401K / 401K Business Financing
Use your retirement accounts (401(k) or IRA) to invest in your business without having to pay early withdrawal penalties or taxes. If you still need more money, this can be used in combination with a SBA loan. The investment into your business may be enough that no collateral is required. Even if collateral would normally be required, an alternative such as a payment reserve and be utilized. Learn more about 401K business financing.
There are many private lenders or financial institutions that would be willing to entertain your loan application with no collateral, provided you offer some personal guarantee. You may use a cosigner, offer some asset or real estate as security or any kind of infrastructure or commodity that is worthwhile. This option is not strictly unsecured but there is the option to use various kinds of assets or commodities as personal guarantee which may work for many business owners. The interest rates of private lenders would be quite high as such loans don’t have backing of the government.
Crowd financing is a potential choice for loan seekers who have no collateral. There are peer to peer lending networks and many small to medium lenders that raise funds from various sources and offer unsecured loans. The loan amounts with this option may be less and the interests would be high but it is often the only option for many businesses.
Right now, almost all SBA Guaranteed loans are variable. For example, the loan rate for a no collateral SBA Express loan is currently Prime + 2.75%. The prime rate can be found at the wall street journal webpage.
Since there is no collateral for the SBA Express working capital loan, how do they determine who qualifies? Credit is a primary factor when lending working capital without collateral. Generally, you should have less than $15,000 in credit card debt, 10% of the loan amount as cash on hand and be able to show a 10% cash injection into your business. Like a mortgage, these can not be borrowed funds, however gifts from family is usually acceptable. Lastly, you need to show “comparable credit” comparable to the amount you wish to borrow. Typically, anyone with a mortgage past or present would qualify. Some exceptions are made for military veterans.
Funding a new Business
Borrowing money to fund a new business is typically very difficult. In the past entrepreneurs have relied on friends, family, private investment, credit cards or personal assets. The most obvious cause of failure in a business is simply running out of money, usually because of initial undercapitalization.
The SBA Express loan was created to fill this gap in startup financing. Thousands of new business and franchise startups are funded every year without person collateral through this SBA product. If you are already in business for two years, this working capital loan is also available to your business.
Financing a franchise Business
One way to minimize the risks of opening a business is to invest in a franchise concept, rather than starting a stand-alone business. Up to 80% of new businesses have failed after five years, while franchises offer support, proven business practices, and a recognizable brand name to draw sales. Owning a franchise provides a proven business model to follow, while still offering the the benefits of owning a your own business. Banks like financing franchise startups for the reasons stated above.
TIP: For a franchise to be eligible for SBA financing, they must be listed on the SBA Franchise Directory