Collateral is a physical asset that a lender accepts to secure a loan. Adding collateral decreases the amount of risk to the lender because the borrower has more incentive to pay back the money owed.
For example, a bank is able to repossess a house if the homeowner fails to pay their mortgage. This guarantee means the bank can make back at least some of its money if the borrower defaults on the loan.
However, not all borrowers have assets to put up as collateral. Even if they have these assets, they might not want to use them.
It is possible to receive an unsecured loan (a loan that doesn’t require collateral) from a lender. You can use this loan as a jumping-off point for your business to turn your startup dreams into a reality.
Here are a few ways to make sure you qualify for a startup loan without collateral.
Once you decide to officially start your business, it might seem like your to-do list is never-ending. However, some steps need to be accomplished ahead of others. Before you start looking into unsecured business loans, make sure you already have the bones of your business set up.
Having these documents on hand will streamline the loan application process. You can prove you are operating a competent business and demonstrate why you actually need funding—even if you haven’t sold a single product yet.
Instead of putting an asset at risk to start your business, some banks may accept a personal guarantee from the founder or borrower. This personal guarantee states that you as the individual will be responsible for the loan in the event that your business cannot pay back the funds.
A personal guarantee is valuable if you have existing credit and personal assets. A high credit score indicates to lenders that you are trustworthy and worth lending to.
In some ways, signing a personal guarantee is like co-signing a loan. Because your business lacks any credit history or assets, you are backing it up with your financial history and therefore taking on that liability.
A blanket UCC lien states that if you default on your loan, the lender can seize all of your assets, including your equipment and accounts payable. This method allows you to use your entire business as collateral even if you haven’t built it up yet.
If you can’t pay back the loan, the lender will look for ways to recoup their funds. They are better off taking any money you have in the company and then seizing your equipment and selling it than to keep waiting for you to make another payment.
This scenario may sound intimidating, but keep in mind that most lenders don’t want to do this. Seizing property is incredibly time-consuming, and your lender likely won’t get the full loan amount back.
Instead, they will send multiple reminders to make payments and may even accept a short-term hardship break to pause the loan while you get your funds together. The most important thing is to communicate with your bank when you can’t make a payment rather than running from them.
The Small Business Administration (SBA) was created with the goal of helping entrepreneurs thrive. There are countless resources for your business and potential loan options to consider, some of which are less than $25,000. Look into services from the SBA to see if you can apply for an unsecured loan. There are some unsecured options, but many SBA loans prefer if the lender uses collateral.
Because the SBA is a federal organization, there may be more paperwork involved in the application process, and it could take longer for your loan to get approved. If you are interested in an SBA loan, start your application as soon as you can so you can navigate the approval process.
For many people, debt is a dirty word. They want to pay back their debts as quickly as possible, especially when starting a new business. However, your business loan is considered good debt—money owed so you can build something and turn a profit in the future. These loans are different from bad debt, like an unpaid credit card bill.
If you are struggling to find unsecured loans on your desired terms, consider changing your expectations. Look for ways to reduce risk to the lender so they are more likely to release the funds.
For example, you can request a longer term so your monthly payment is lower. Instead of paying back the loan in a year, agree to a 5-year repayment plan. This longer term will significantly drop your monthly payment and make the loan more manageable.
If you are still hitting roadblocks with the loan application process, consider taking out a smaller business loan. Instead of requesting $30,000, ask for $5,000.
Take steps to repay this loan over the course of the year while also following healthy financial best practices for your business credit cards to build up your business credit. A lender who doesn’t want to work with you today might change their mind once you have proven yourself and built your business credit history.
While this slows the potential rate of growth for your business, it still allows you to get your foot in the door right now.
Loans come in all shapes and sizes. You can take out a short-term loan to give your business working capital or look into a business credit card to cover day-to-day expenses. You can take out a loan for less than $1,000 or more than $5,000,000, depending on your needs.
At Lendio, our job is to help businesses find the right financing at the best rates. If you are looking to fund your startup, turn to our lending center. Learn about your options to take out a small business loan without putting your assets up as collateral.