Getting Funding Through No Collateral Business Loans

No Collateral Business Loans Can be a Lower Risk Option

No collateral business loans give you access to working capital without risking personal or business assets. While it’s common for traditional banks to require some form of collateral on their loans, whether it’s a personal asset like a vehicle or a business asset, alternative lenders can offer no collateral small business loans to make financing accessible to business owners with limited assets.

What Is a No Collateral Small Business Loan?

Business loans are often backed by collateral. It’s really simple in practice. Banks prefer to know that, in the event you can’t pay a loan back, they have a way to collect value as security against the loan. So if you can’t keep up with payments, the bank will collect the collateral.

Banks will typically prefer valuable assets to secure a loan. If your business uses a lot of special equipment or has real estate assets, then you can put those items up to back the loan. But many small businesses are built around services, not assets. Even in sectors like construction or landscaping, the actual equipment used isn’t valuable enough to secure a loan. In these cases, small business owners often use personal assets – such as their homes – to secure the loan. This gives banks security but can be risky for the small business owner. No collateral business loans protect your assets.

If you’re looking for a small business loan and don’t want to risk your house or other personal assets, a no collateral business loan may be right for you.

Alternatively, lenders can require a personal guarantee or UCC filing in lieu of physical collateral on a loan. This option still provides protection for the lender in case of default and reduces the risk for the borrower by not tying any physical assets to the loan.

A personal guarantee is a stipulation in the a loan agreement where the borrower promises to repay the loan, using personal assets if necessary. A UCC filing stipulates the lender can place a claim on a business’s assets as collateral for a loan and acts as a public record of their claim on the borrower’s assets.

How Do No Collateral Business Loans Work?

If no collateral business loans reduce risk for small businesses, but lenders need to secure loans to protect themselves, then how are unsecured small business loans even an option?

In essence, lenders either limit the scope of a loan or make it more expensive if there isn’t collateral. This makes an unsecured loan an option, but that doesn’t mean a no collateral business loan is always the right option. Let’s look at some scenarios where this type of funding makes sense:

Equipment Financing

Equipment is among the most common types of collateral used to back small business loans. With financed equipment, the equipment itself acts as the collateral against the financing.

Many small businesses need equipment – service vans, specialty tools, etc. – that is available at a low enough cost to fit the small-scale loan size. This can make equipment financing a win-win for no collateral business loans. The lender is providing a small enough amount of funding to avoid serious risk. The business is getting vital equipment without putting its other assets at risk.

Bad Credit Loans

Getting a loan with bad credit can be tough. It is often even more difficult if your credit situation makes you wary of offering assets to secure the loan. Bad credit loans use your business’s cash flow to figure out how much funding you can afford. This makes the funding option a natural fit when you’re looking for a no collateral business loan. While a bad credit loan can be pricy, it can help build your credit and get you financing for your business.

Working Capital

Sometimes your business just needs cash. An in many cases, you don’t want to put your most valuable assets up to secure a loan when you simply need quick cash. Whether it’s $100,000 to buy supplies for a major project or $25,000 to cover payroll during the offseason in your industry, the right loan is vital. Lenders that can get you funding quickly are hugely valuable. When those lenders also offer a way to get that injection of cash without collateral, the stars align. In practice, no collateral business loans are ideal when you need a small amount of quick cash, with as little risk as possible. An unsecured working capital loan is a prime example of this type of funding.

No Collateral Business Loans Reduce Your Risk

Lenders require security when issuing a loan, which is why lenders look at criteria such as revenue and credit score when considering an application. Collateral typically acts as an additional layer of protection for the lender and ensures the lender gets their money back in the case of default. Without the guarantee of collateral in a loan, some lenders may offer smaller funding amounts and higher interest rates in lieu of collateral.

While no collateral loans can be difficult for a borrower to get, they help provide peace of mind to business owners who need capital without risking their assets.