For a small business owner, running a business comes with many risks, mostly financial. Therefore, having to offer personal or business properties for new investments is not necessarily at the top of your wish list when it comes to getting a loan. So how do you get small business loan with no collateral?
Collateral vs Personal Guarantees
Collateral is different from personal guarantee, if a lender is trying to get collateral on your loan and you don’t have one, then they will try to impose some kind of personal guarantee from you instead
What is collateral?
Each “secured loan” uses an asset as collateral against it. It could be property, land, shares or options on the company’s shares. In the event of loan default, the lender can seize the collateral instead of paying the loan. This obviously reduced the risk for the lender, who in turn values the loan through lower interest rates, which is reflected in the risk / expense of the lender.
Although asset finance is usually offered with built-in security, the same is not true of standard small business loans and although there are many entrepreneurs who do not want to risk their business assets, there are others who do not have the assets to put up as collateral.
What are personal guarantees?
Personal guarantees allow entrepreneurs to get access to finance and loans by putting their finances as collateral against any default. When a default occurs, there is a personal loss on the part of the business owner and a negative impact on their credit rating.
Unfortunately, for new businesses and those with poor or limited credit and business history, it is difficult for lenders to arrange financing without personal guarantee.
For entrepreneurs, this means shifting legal responsibility for their business loans to their personal assets. It may also mean that banks will seek to extend their legal entitlement, not only to their own assets, but also to the assets of their spouses and families.
For joint business owners, all personal guarantee owners have the potential, depending on the contract details, to allow the bank to pursue 100% of a single partner’s debt if the others cannot pay.
Why You Don’t Want A Loan With Collateral
While secured loans are often the best, businesses sometimes have no choice and may feel pressured to accept small business loans with personal guarantees. It doesn’t have to be that way. Here are three reasons why you might not want to take out a loan with collateral:
- You don’t own enough business (or personal) assets
- You don’t want to risk your business (or personal) assets
- Banks will undervalue your assets anyway.
The reason banks like to have collateral, even if they don’t really want to have the problem of collecting and selling your assets, is because they also have to borrow money (from other banks). And their finances are controlled by the extent of their liabilities! Remember that the banking crisis was caused by the (subprime) mortgages in America, the financial collateral of which simply did not add up.
Alternatives to Small Business Loans Without Collateral
Most small business loans that do not require collateral will nevertheless ask for personal guarantees, but there are nevertheless varieties of small commercial enterprise finance that provide funding without either of them:
- Peer-to-Peer Finance
This requires cooperation between individuals, usually using an alternative online lending platform. Individual investors provide the money based on the applicant’s business plan. Again, interest rates and loan terms are often dictated by the company’s profitability in repaying the loan, which is usually closely tied to its credit history.
- Equity Finance
Again, this is not strictly a small business loan, but a way to generate finance for your business when you have no collateral, personal security, and no business history. However, in this case, in exchange for an investment, you are permanently giving away a part of your business, this is the domain of business angels.
It has gained popularity when individuals, private and public investors can come together to finance a business. Be careful, unless you have spare time and a knack for marketing or a sexy tech product, it won’t be suitable for all types of businesses.
- Cash Advance
Not loans, but financing vehicles that offer advance financing (a cash advance) in exchange for a percentage of daily / weekly sales made, until the agreed loan is repaid, plus interest.
How to Get A Small Business Loan With No Collateral
It is possible for almost any business to obtain an unsecured business loan. And while they don’t require collateral or personal guarantees, they will charge higher interest rates in return than a traditional loan. This article gives a valid explanation on how can I get a loan to start a business without collateral.
Approaching a bank without planning due diligence and a clear business plan outlining what, how and why a loan is needed will usually be met with outright rejection. However, regardless of your limited credit or business history, reaching out to another lender, armed with a clear business plan, can take you further than you might think.
What you will need to do is make sure that you are doing all you can to improve your credit and come up with an interesting business proposition:
- Improve your credit report
Without collateral, the focus will be more on your credit score. Improving it will mean increasing your chances of getting better rates. You can help by paying off as much debt as possible and keeping your credit account balances as low as possible. It also makes it possible to reimburse suppliers and debtors in a timely manner, without opening or incurring new debts. Your credit report does not always exclude lines of credit, but it is the main qualifier of the rate of credit that is offered to you.
- Do your research
There are loans that do not require collateral. Most of them are unsecured loans and with a little research you will be able to find them available. They generally have higher interest rates and shorter maturities, which reflects the greater risks taken by lenders. But for a short term loan, an unsecured business loan may be all you need. Taking out a loan and meeting the loan obligations also helps improve your credit score and build lender confidence the next time you apply. If you’re up for some footwork, go online and research the possibilities.
- A winning business plan
The basics of a solid business plan include the overview of your business, its revenue, a calculated growth plan, a detailed business strategy, financial statements, and income statements (based on current levels and showing how the investment will change that). you need to be clear on what you will be using for any loan investment, making it clear where it will go, what it will buy and how it will increase profits. Your business plan should be a combination of reducing any perceived risk in your business as a demonstration of profitability.
- Look for unsecured business loans
Your business may qualify for an unsecured business loan without the need for collateral or personal guarantee. Your business may be eligible for a merit loan if your business has any of the following characteristics:
- Financial records showing a history of consistent profits.
- Compelling Business Projections Excellent business and personal credit record
- Strong net worth and healthy cash flow.
Why The Lending Market is Moving Towards Unsecured Loans
With more and more businesses, especially digital and tech companies, offering products without physical assets, lenders must find better ways to offer financing.
It is not uncommon to see loans over £100,000 unsecured, although how the personal guarantees are used in each case can be an important consideration.
Due to the need for quick financing, unsecured loans have become increasingly lean, generally much faster to set up than regular bank loans for small businesses.
- More start-ups from rising entrepreneurs
- Increased funding directed towards emerging technologies
- The move towards the digitisation of lending.
With this in mind, count on unsecured loans to grow to be even greater famous and competitive
At the instant the most important disadvantage to approaching alternative creditors for loans without the want for collateral is glaringly the rates. Because the lender is taking over all the chance of non-payment, rates ought to be more than that of the banks, who will ask for security.
But it’s often a small price to pay to enter the loan market and allow businesses to grow and develop and take advantage of specific opportunities over time. It marks the shift from long-term secured loans to short-term unsecured loans aimed at rapid growth and profit exploitation.