How To Get Small Business Loans Without Collateral

Most small business loans, especially those guaranteed by the Small Business Administration (SBA), require the borrower to put up collateral. This gives the lender peace of mind in case the borrower is not able to return full payment. 

However, it is possible to get a business loan without collateral. You have several options to fund your business. Which option is best for you will depend on your business and your unique needs. 

What is a no-collateral business loan? 

A no-collateral business loan, also known as an unsecured business loan, is a loan that doesn’t require the borrower to provide collateral, such as a car, cash, or other company assets, for approval. 

Secured loans vs. unsecured loans 

Secured loans or collateralized loans are loans that require collateral for approval. Secured loans are less risky for the lender but riskier for the borrower. If the borrower can’t pay back the loan, the lender can claim the asset or assets used as collateral as repayment. 

Unsecured loans or loans without collateral aren’t backed by a specific asset. Unsecured business loans are riskier for the lender but less risky for the borrower. If the borrower defaults on their loan, the lender can’t seize any assets, but they can raise interest rates and fees or send the loan to a collection agency. Small business loans without collateral may be an option for business owners who lack collateral, have a short credit history, or have a lower credit score to consider. 

Benefits of no-collateral loans 

If you’re looking at next steps for growing a business, the benefits of no collateral loans include: 

• No assets tied to your loan: Since you don’t have to put up collateral for approval, you won’t risk losing your assets if you can’t repay your small business loan. 
• Faster approval process: Business loans without collateral are usually processed faster than loans that are secured by collateral, allowing you to access funds more quickly. 
• More flexibility: With a secured loan, the amount of funds you receive is usually 70 to 80 percent of the value of your collateral. With an unsecured business loan, you have more flexibility to borrow based on what you need. This makes unsecured loans a good solution for small business owners with short-term financing needs. 
• Ease of use: If you apply for a secured loan, you’ll likely have to provide the reason why you need the loan. A no-collateral business loan, on the other hand, typically can be used for any reason, such as covering payroll, expanding your business and purchasing inventory—potentially helping you boost revenue for your small business. 
• Build your credit score and history: You can use business loans without collateral to help improve your credit history if you make on-time payments and manage your loan responsibility. Increasing your credit score can help you get approved for other loans or lines of credit in the future. 

What kind of a loan can I get without collateral? 

No-collateral business loans come in many forms, providing a range of options for small business owners seeking funding for sustained growth. Common types of loans without collateral include Small Business Administration (SBA) loans, lines of credit and peer-to-peer (P2P) lending. 

It’s important to understand these different types of no collateral loans when applying for funds for your business. 

Loans backed by the Small Business Administration  

The SBA guarantees most loans that go through banks. It is much easier to get an SBA guarantee if you put up collateral, but that is not your only option. 

The SBA has a 7(a) loan program that simply requires the borrower to show proof of positive cash flow for debt service and acquisition price. If accepted to this program, the SBA will guarantee 75% of any loss on the loan to the lender. 

Line of credit 

A business line of credit allows you to borrow money up to a certain credit limit. Like a credit card, you take out what you need when you need it, and then pay back that money in installments—including any interest and fees. Provided you don’t exceed your credit limit, you can continue borrowing from your line of credit as long as your account is open. 

Say a small business owner has a line of credit with a limit of $6,000 and an interest rate of 10%. They take out $500 to cover inventory purchasing. Once they repay that $500 plus $50 interest, their available credit should reset to $6,000. 

For small businesses, the benefits of a business line of credit include: 

• Helping meet short-term financial goals: Small business owners might use a line of credit to jump on immediate investment opportunities, pay bills on time, or adjust to seasonal changes in the market. 
• Only paying interest on what you use: With a line of credit, you only have to pay interest on the money you take out. For example, if you have a credit limit of $5,000, but if you only use $1,000, interest accrues only on the $1,000. With an installment loan, on the other hand, you receive a lump-sum payment up front and pay interest on the whole thing, even if you don’t end up using all of it for your business needs. 
• Flexibility and ease of use: You might not know how much money you need to fund a certain project or business goal. A line of credit gives you the flexibility to borrow different amounts over time and be ready to face unexpected changes. 

A line of credit might offer the right funding solution for your small business, if you’re looking for flexibility, ease of use, and a reliable stream of funds that you can access as needed. 

Term loan 

A term loan is a financing solution that provides the borrower with a lump sum of money, which they then pay back after a certain period of time. The lender will set the repayment schedule, fixed or variable interest rate, and loan terms. Some lenders may also require down payments for term loans. 

Term loans come in a few forms: 

• Short-term loans, which run from under a year to 18 months 
• Intermediate-term loans, which run from one to three years 
• Long-term loans, which run from three to 25 years and may require collateral for approval 

Businesses often use term loans to purchase fixed assets, such as equipment or a new retail space. Short-term business loans may prove helpful for small businesses looking to cover immediate financial needs, such as startup costs, emergency repairs and seasonal gaps in cash flow. Learn more about how to use a short-term loan to grow your business. 

Invoice factoring 

Invoice factoring is the process of selling business assets—accounts receivable or invoices—in exchange for working capital. An invoice factoring loan helps you access cash quickly, sometimes in under 24 hours. 

Here’s how invoice factoring works: A factor purchases the right to collect your invoice once the payment comes through, minus a discount of 2-6%. The factor will pay 75% of the invoice to you upfront and then pay the rest once they’ve collected the full amount. 

Invoice factoring is a common solution for businesses with long and steady receivables, such as those in the clothing industry. Factoring is also used as a short-term, one-time solution for accessing cash. 

Merchant cash advance 

With a merchant cash advance, a small business receives a sum of money upfront from a merchant cash advance company. The business owner then repays that debt using a percentage of their future sales, plus any additional fees. For example, the lender might provide the cash and then automatically deduct a percentage of the business owner’s credit card sales until the debt is fully repaid. 

Merchant cash advances are suitable for small businesses that need quick access to funds and are looking for an alternative to a traditional loan. While merchant cash advances generally have high approval rates, they can also typically come with higher interest rates and fewer regulations than traditional loan options. 

Peer-to-peer financing 

Peer-to-peer (P2P) lending doesn’t operate through traditional financial institutions. Instead, it requires the cooperation of individuals. Individuals provide unsecured loans to borrowers based on their business plans. 

When receiving a P2P loan, everything is done online. Oftentimes, these types of loans have higher interest rates and shorter terms. The specifics can vary, as everything is based on the credit history of the borrower. 

Can I get a loan without collateral if I have bad credit? 

A business loan without collateral can help small business owners who are seeking fast financing. However, many lenders will require a good credit score and proof of a strong credit history. 

While it’s possible to get a business loan if you have bad credit, you can also take key steps to build business credit and become eligible for more types of loans in the future. 

You may be able to qualify for a business line of credit, invoice factoring, or a merchant cash advance based on criteria like your business revenue, growth plan, and even online ratings. 

The easy way to get a small business loan without collateral 

In most cases, your chances of receiving a small business loan increase dramatically if you can put up collateral. So, if possible, wait until you have collateral or find some. If that is not possible, you have a few options such as crowdfunding, investors, or alternative lenders.  

Working capital allows small business owners to access their funding on an ongoing basis.