Tags: , ,

Three Ways to Fund Your Small Business Without Collateral


Minyang Jiang

By Berrak Sarikaya, Lendio

Lending money can be a risky business, which is why most traditional lenders require borrowers to put up collateral for a loan. Collateral is simply a valuable asset, such as your house, car, or even a savings account in your name. In the event you’re unable to pay back your loan, collateral provides insurance for the lender; they can seize and liquidate it to recoup some of their loss.

You may be a financially stable and qualified small business, but the economy can be fickle. Most lenders don’t want to carry the risk of a borrower defaulting on a loan, which is why they ask for valuable assets to secure your financing.

Related:What’s the difference between secured and unsecured business loans?

Know Your Options for No-Collateral Business Loans

If it’s time to get funding for your small business but you don’t have collateral to secure a business loan, you may think you’re out of both options and luck. Know there are financing options outside of traditional loans, and you don’t have to settle for incredibly high rates or unfavorable terms to get them.

SBA Loans

The Small Business Administration (SBA) establishes the guidelines for loans and then guarantees a portion of those loans. Because of their strict guidelines and guarantees, lenders are more confident, which means higher rates of approval for small business owners seeking financing. The benefits of an SBA loan don’t stop there. There are a couple different types of SBA loans to ensure you’re getting the right kind of financing to fit your needs.

  • SBA 7(a) loan: This is probably the loan you’re most familiar with as a small business owner. Most of the time, you don’t need more than few thousand dollars to help you find your footing, which is why the SBA 7(a) loan is a great option since loans less than $25,000 may not require collateral. You can use the funding from an SBA 7(a) loan to buy land, refinance existing debt, cover construction costs, or buy supplies for your business.
  • SBA 504 loan: While this is similar to the 7(a) loan, it’s actually a little more complicated. SBA 504 loans are for funding specific projects, which means a more thorough examination of your project costs. You must also use your 504 loan to finance a fixed asset, and your business must have a tangible net worth of more than $15 million.

While unsecured SBA loans are significantly easier to attain than a loan from a traditional bank, they’re known for being more paperwork intensive, with a much longer time to fund and a higher rate of rejection than direct online lenders.

Business credit cards

A business credit card is a great option for a small business owner who is getting established or wants to have a more instant source of funds for the unexpected. Business credit cards are great supplements to any other financing you may have in place for your business, with a lot more flexibility.

Bonus: The right credit card is also a great umbrella for your business in case of a rainy day.

Loans from online lenders

When the world is at your fingertips thanks to technology, shouldn’t there be better options for finding financing for your small business? Online lenders have become more mainstream over the past few years, giving business owners more accessible options to fund their dreams.

No two businesses are alike, which is why term loans from online lenders are structured to fit the needs of your business, whatever they may be. By design, business loans from online lenders are more flexible and fund faster, precisely what small business owners need. You can choose from two types:

  • Business term loans: With a business term loan, lenders advance you a lump sum that you repay over the course of the next 12 to 60 months. Since these loans usually have a fixed interest rate or fixed flat fee, it’s easier for you to plan your monthly repayment rate. The application and funding process for these loans are a lot easier and faster than traditional loans.
  • Working capital loans: Sometimes, you need a quick injection of cash into your business due to unexpected expenses. If you’ve been in business for two or more years, you could qualify for a short-term loan. These are easier to qualify for (usually within a 24-hour period), and the payback period is usually between 3 and 18 months.

If you’re not familiar with collateral-free loan options, it can feel intimidating to evaluate them on your own. Working with a small business specialist like Credibly ensures you’ll find the right loan for your business and will also help you get the best deal out there.

Alternatives to No-collateral Small Business Loans

For business owners without ample 8 out of 10 businesses eventually fail, and the primary cause of business failure is lack of investment capital. In order to give your small business the highest chance of success, accessing reliable funding is imperative.

Unfortunately, many businesses neglect to apply for loans, as they worry they may not qualify or they’ll end up accruing greater financial debt.

One of the biggest obstacles standing between small business owners and financing is the intimidating amount of collateral that most loan options necessitate.

Many people lack the necessary assets to provide collateral, making it difficult to qualify for commercial loans.
href=”https://www.credibly.com/guides/collateral-loans/” target=”_blank” rel=”noopener noreferrer”>collateral to secure a loan, there are alternative financing options to get you the money you need.

Private Equity Investing

Private equity investing provides entrepreneurs and established businesses with access to ample funding.

While collateral isn’t required, you do need to pitch an outstanding business proposal to investors in order to convince them to purchase shares of your company. The shares they purchase entitle them to a portion of your future profits.

The business plan should contain a compelling financial proposal that outlines your projected revenue plan and business growth, as well as detailing precisely how the money will be spent.

Business Cash Advance

A business cash advance provides an excellent financing option for those without collateral. Most business cash advance agencies don’t run credit checks, making it highly accessible to entrepreneurs of all backgrounds.

The application only takes a few minutes to complete, and applications are generally approved in 24 to 72 hours. The amount of money you qualify for will depend on your current monthly sales, but monetary amounts can reach up to $250,000.

To repay the money, a percent of daily or weekly sales will be automatically deducted from your account.

Revenue-Based Financing

Revenue-based financing is similar to private equity, except you don’t need to sign over a portion of your company in the process. Much like with private equity, eligibility will be determined based on your business plan and the potential success of your business.

To be approved, you need to demonstrate high potential growth, strong financials, and accurate revenue projections. The money is repaid based on your business’s revenue, with a negotiated percentage paid monthly.

Unsecured Line of Credit

A business line of credit can provide your company with a readily available cash flow for whenever you need it. Unlike a secured line of credit, where an equivalent amount of collateral is needed, unsecured credit lines are provided to borrowers at no collateral.

As a result of the elevated financial risk, unsecured credit lines are only available to business owners with excellent business credit and significant annual revenue.

Many business owners lack the needed assets to secure their loan with collateral. Given many lenders are unwilling to provide loans without collateral, this leaves business owners strapped for cash when they need it most.

By pursuing alternative funding options, like business cash advances and private equity, you can qualify for large investment quantities without needing to wager your property as compensation.

Which funding is right for your business?