In order to grow your small business, you will most likely require financing at some stage or another – whether that’s the small boost in cash that a short-term business loan provides or longer-term assistance from other funding methods.
Here’s the thing though: with many traditional lenders (i.e. banks) seeking collateral such as property to secure the loan, some small business owners are at a loss. They either don’t have the collateral required, or simply don’t want to risk losing something as important as their family’s home.
While obtaining a business loan without collateral once seemed like an impossible task, those days are now well and truly over. Thanks to non-traditional lenders (such as Lumi), obtaining business finance without collateral isn’t just possible, but easy.
Firstly, What is Collateral?
If you’re reading the word ‘collateral’ and scratching your head, don’t worry. This term simply refers to an asset you use to secure the loan. In other words, something that can be sold in the case that you’re unable to repay your loan successfully. The funds from this sale would then be used to pay the remainder (or a portion) of the loan.
Just some of the most popular forms of collateral include:
- Property (including residential, commercial, or rural land)
- Cars
- Equipment
- The value of your business
As you can imagine, business owners take huge risks in using something as precious as their home as collateral. This is why many are now seeking the flexibility that unsecured financing offers.
Keep reading to find out more about unsecured business loans, along with the other ways your SME can obtain a small business loan without collateral.
Unsecured Business Loans
Known as an unsecured business loan, this type of small business funding simply requires a personal guarantee, as opposed to collateral. A personal guarantee is a written promise from a business owner (and / or business executive) which guarantees payment on a loan in the event that the business does not pay. If the business cannot repay the debt, the individual guarantor is personally responsible. If you sign a personal guarantee and you don’t repay the loan, keep in mind that it could hurt your credit score.
Since it is unsecured, this personal guarantee is not tied to any specific asset, such as your home, vehicle, savings, unpaid invoices, or inventory. Although this is the case, you still need to meet income and credit requirements when obtaining the unsecured business loan.
What Other Ways Can You Get Business Finance Without Using Personal Assets as Collateral?
Although an unsecured loan is a great source of funding for your business if you meet all of the lender’s requirements, there still are some additional financing options for those who cannot, or choose not to, offer personal assets as collateral. We’ve outlined each of these below.
Business Line of Credit
Although a business line of credit can be secured, you can also obtain this form of business financing on an unsecured basis. A business line of credit allows you to borrow a certain amount of capital annually, just as with personal credit. You make payments only on the credit you’ve actually used, therefore helping you to manage cash flow shortages or cover surprise costs until you have the funds.
Unlike long term or short term loans, you won’t have a regular monthly payment schedule, but there usually are minimum monthly payments required. Just keep in mind that this type of financing shouldn’t be used for long-term investments or major purchases. Interest and late fees can compound quickly, so you’ll want to make your repayments ASAP.
Invoice Financing
Invoice financing allows businesses to borrow money from a lender based on the amount of money due from their customers. It is beneficial for many businesses as it lets small business owners use money owed to them as a loan asset, enabling them to get paid for outstanding invoices right away.
Although invoice financing is classed as a secure loan, you needn’t worry about losing the roof over your head, as you are using your outstanding invoices as collateral for the loan. The total loan amount depends on the amount owed to your business, as well as the creditworthiness of your customers.
Equipment Financing
Equipment financing is another type of small business loan which allows you to receive financial assistance without the need for personal collateral such as your home, car, or other personal assets. Similar to invoice financing, however, this type of loan still requires collateral, but this is in the form of existing equipment or the equipment you want to purchase, therefore eradicating the risk of losing a personal asset if you are unable to repay the loan.
It is a type of business loan designed specifically for the purchase of business equipment, allowing you to purchase and start using the equipment right away and make payments toward what you borrow over time. The loan amount and terms are dictated by the price of the equipment and once you’ve made all of your payments, the equipment is yours to keep.
Merchant Cash Advance
A merchant cash advance is designed for retailers receiving a high proportion of payments via credit card or EFTPOS, such as shops, cafés and restaurants. The borrowed funds are secured by or tied to your future transactions or income, therefore alleviating the need for any collateral.
How it works is that a lender purchases a business’s future cash flow, and uses future transactions to repay the borrowed funds, in addition to a fee charged by the lender for the loan product. The lender takes a percentage (usually up to around 20%) of each future sale the business makes until the debt is fully repaid.
Business Credit Card
A business credit card serves as an unsecured loan which is based on your personal credit history. It works almost exactly like a personal credit card does, however it is used to pay for business-related purchases.
There are many different types of business credit cards, including rewards cards, interest-free days cards, low rate cards and corporate cards. Small business owners are advised to shop around and find out about each business credit card type to see what works best for them. If users stay on top of their repayments and fully understand the terms and conditions of their credit card, then it can be a successful way to seek extra finance for their business.
There you have it – the many ways you can get a small business loan without collateral! Have you benefited from any of the loan types above? We’d love to hear about your experiences in the comments below.
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