Nearly all small business loans require some form of guarantee. This condition is understandable, as lenders would quickly go out of business if they handed out money indiscriminately and were simply out of luck if the borrower decided not to repay it. Something needs to be in place to protect the lender from the possibility of default.
Most often, loans are secured with collateral such as vehicles, homes, equipment, inventory, or real estate. If you were unable to make your payments and you couldn’t reach a compromise with the lender, they would then take possession of the collateral to recoup the money they lost due to the payments you won’t be making.
But some entrepreneurs don’t have possessions on hand to serve as sufficient collateral. And others simply don’t like the idea of putting their beloved assets on the chopping block. So it’s important to know how to get a loan without collateral.
Most often, an unsecured loan serves this purpose. Where secured loans provide the lender a guarantee via collateral, an unsecured loan doesn’t include this factor.
As you can imagine, lenders aren’t as motivated to hand out unsecured loans. Because this type of financing is riskier for them, they raise the stakes when it comes to qualifying. If you’re an established company with solid credit history, income, and savings, you could potentially get the green light. But if you’re a newer company or have less-than-stellar financials, an unsecured loan probably isn’t in the cards for you.
Additionally, an unsecured loan usually comes with unique caveats. For starters, the amounts rarely exceed $50,000 and the application process takes longer. Also, lenders will structure the loan to minimize their risk, meaning you’ll probably face higher interest rates and shorter repayment terms.
It’s important to note that unsecured loans may also include a personal guarantee. This condition means that while you won’t need to put your house up as collateral, you would still be personally responsible if your business defaulted on the loan. So while your home (or whatever other asset you could offer as a guarantee) wouldn’t necessarily be tied to the loan as collateral, it could still be in limbo if you were to find yourself unable to meet your debt obligations.
If you need funding but prefer to avoid the personal guarantees that often accompany traditional loans, you might be the perfect match for an unsecured business line of credit.
“An unsecured business line of credit is a great option if your business needs access to cash on demand,” says SBA.gov. “Business owners want access to funds—whenever they need it, at a competitive rate, and with flexible payment options. The National Federation of Independent Businesses says, ‘Think of it as an insurance policy that never needs to be paid until you need it.’”
By looking at flexible options like an unsecured business line of credit, you can get the full array of possibilities. This greatly increases your odds for finding financing that doesn’t require collateral.
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