Owning a small business is risky enough without putting valuable assets, like your home, on the line as collateral for a business loan. But is there any way to get a small business loan without pledging collateral?
Yes… And no.
Technically, some lenders will not ask for collateral—but they will ask for other types of guarantees. Here’s a closer look at how to get a small business loan without collateral.
There are two basic types of small business loans—secured loans and unsecured loans.
Secured loans are “secured” by collateral—a real asset that the borrower pledges as security, like real estate or savings.
If you default on the loan, the lender will seize your collateral and liquidate it to pay off the loan. It’s easy to see why lenders like collateral: It lessens their risk and makes them more comfortable lending to your business.
But it’s just as clear to see why some business owners are reluctant to put up collateral to get a loan. Meanwhile, others are willing to put up collateral, but are so new to business that they don’t have any assets to pledge.
Collateral vs. Personal Guarantees
While some small business loans don’t require putting up collateral, it’s important to understand what these lenders want in exchange. Generally, if you’re not putting up collateral, you’ll be asked to sign a personal guarantee—agreeing to personally pay back the loan if your business cannot.
Depending on the type of personal guarantee you sign, the lender could sue you personally and then seize your personal assets to pay back the loan, interest, and even legal fees. Even if your business is a corporation, LLC, or other form of business that protects your personal assets, the terms of the personal guarantee could invalidate that protection.
Suddenly, the idea of putting up collateral sounds a lot more appealing, doesn’t it? In general, if you can possibly put up collateral, it’s best to do so.
Business Loans That Don’t Require Collateral
But what if you don’t own a home, you’ve put all your savings into your business, and your business has no assets suitable to serve as collateral?
Consider these options for how to get a small business loan without collateral:
1. Peer-to-peer Lending
Peer-to-peer (P2P) lending sites match individuals looking to borrow with others looking to lend. There are sites that specialize in business loans and others that offer personal loans.
A merchant cash advance provides an advance on your future credit card sales. The loan is repaid automatically by drawing a percentage of your credit card sales from your bank account on a daily basis.
3. Line of Credit
Some business lines of credit do not require collateral. However, unsecured lines of credit typically require a strong personal credit score, a track record of business success and high annual sales.
4. Business Credit Card
Unsecured business credit cards can offer an alternative to putting up collateral if the amount of money you need is relatively small.
(Psst… You can apply for a business credit card right here!)
On the downside, all four of these methods are more expensive than a secured business loan. They typically also have lower limits, restricting the amount of financing you can get.
A better alternative: Get a loan that uses the item you’re purchasing with the loan proceeds as collateral.
Do you need financing to buy an expensive pizza oven for your restaurant?
An equipment financing loan that uses the oven as collateral for the loan could be the answer.
Does your retail store need to stock up on toys for the holiday shopping season?
Try inventory financing, which uses the inventory you buy as collateral for the loan. If you default, the bank will take the equipment or inventory you purchased and liquidate it—but at least you haven’t lost any personal assets.
Whether you’re seeking a secured or unsecured loan, always be sure you understand the cost of the money you’re borrowing, the terms of the loan agreement and any personal guarantee, and the potential ramifications of failing to pay the money back.
The post How to Get a Small Business Loan Without Collateral appeared first on Fundera Ledger.
from Fundera Ledger https://www.fundera.com/blog/2016/08/04/how-to-get-a-small-business-loan-without-collateral/