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It’s no surprise that loans are a popular way for business owners to finance some of their new and growing business’s expenditures, but sometimes, they may not want to provide collateral for those loans. Fortunately, there are a few ways to acquire a loan without collateral. There are some loans you can apply for by only providing a personal guarantee or a UCC lien.
Secured vs. Unsecured Loans
Secured Loans
Before we cover the different types of loans, as well as personal guarantees and UCC liens, let’s briefly discuss secured and unsecured loans. The defining factor of a secured loan is that it requires an asset to act as collateral to secure the loan. An unsecured loan does not require an asset. The reason lenders have secured loans is to minimize their risk. Lenders typically prefer to have a loan with this built-in security because new businesses pose a financial risk. For example, an auto loan is a well-known type of secure loan. These typically have the car as the set collateral. So, if a borrower can no longer make payments to the lender within the prespecified time frame, the lender has the option to repossess the car.
Unsecured Loans
Then, there are unsecured loans. These do not require any asset as collateral. Given the unsecured nature of these loans, they rely heavily on the borrower’s credit history and income. Due to these more stringent standards, qualifying for unsecured loans is more difficult.
Personal Guarantee and UCC Lien
Personal Guarantee
One of the ways business owners qualify for unsecured business loans is by providing a personal guarantee. A personal guarantee places responsibility on the individual business owner to uphold a guarantee that the business loan will be paid off. In the case of default, the owner is held personally responsible. A personal guarantee assures lenders that a business and its owner(s) are most likely serious about acquiring the loan and can make payments, as they’ve staked their capital and other personal assets on it.
UCC Lien
Another way business owners qualify for unsecured business loans is by agreeing to a UCC (Uniform Commercial Code) Lien, which are also referred to as blanket liens. Blanket liens enable a lender to confiscate a small business’s assets in the event they default on their loan payments. This lien is a form of security and insurance for lenders because it ensures that they can still get compensation for the amount they were owed via the borrower’s assets. Many loan offers have blanket liens in them, so it’s important to carefully read the offer, preferably with a trusted financial advisor. More importantly, make sure you have sufficient capital and an organized payment plan in place before you even seek funding. Being prepared will help the whole process go smoothly for both parties involved.
Which funding options do not require collateral?
SBA Loan
As we have mentioned before, SBA loans are among the cream of the crop of business loans. What you might not know is that, in many instances, these loans do not require collateral on the part of the borrower. They’re also one of the most affordable loan options in the lending world. That being said, they are among the most difficult for which to qualify. Due to the steep qualification standards, lenders are less apprehensive about lending to small businesses who qualify for these loans because they’re taking less of a financial risk.
Merchant Cash Advance
Merchant Cash Advances (MCA) are among the easiest types of funding to acquire. They also do not require collateral. That being said, they are usually expensive and have more rigid terms than most other loans. An MCA will give you an upfront sum of cash in exchange for a percentage of your future sales, and this percentage goes right to the lender.
Long-Term Loan
Term loans, including Long-Term Loans, offer a straightforward, affordable funding solution for small businesses. They also do not require collateral. A traditional business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate. The set repayment term length will typically be one to five years long. Most business owners use the proceeds of term loans to finance a specific, one-time investment for their small business.
Short-Term Loan
The next most accessible type of business loan on our list is the short-term loan. Short-term loans function like a condensed version of a traditional term loan. The borrowing business gets a lump sum of funding that it will pay off, plus interest, over time. With short-term loans, the loan amounts will usually be smaller, the interest rates will be higher, and the repayment terms will be shorter. Instead of scheduled monthly payments, you’ll likely pay scheduled daily or weekly payments. Some short-term loans even express their rates in factor rate instead of APR’s (which is a tell-tale sign of some pretty expensive funding).
Business Credit Card
Business credit cards are another popular method of financing and can be a great move in the short-term. If you are able, it’s best to choose a plan with 0 percent APR in its initial period. This allows you some time to make credit card payments without interest, usually for up to 15 months. At that point, it’s best to pay your balance before the interest rate kicks in.
The Bottom Line
If you’re a business that does not want to offer up collateral as part of a financing agreement, have no fear. There are options out there; however, you may want to pump the brakes before actively seeking lending. First, consider if you legitimately have anything of value to put up as collateral. Most businesses have something. If you don’t, it’s alright. You should not be seeking funding if you’re afraid of defaulting on the loan anyway. It’s critical to have a detailed and solid plan on how you will make payments on the financing.
