As a business owner, it can be hard to execute your business plan to grow your company and fill your bank account. You need capital to reinvest in your business and cover unexpected expenses. You can build working capital over time, but most small businesses operate on small enough margins that the business owners have to rely on some type of loan to fill in funding gaps.
Small business loans are an invaluable asset as a business owner. But most financial institutions require collateral, or a personal guarantee, for their small business loans. This type of loan is known as a secured loan since it requires collateral.
Many small businesses do not have assets to offer as collateral and even if they do, it can take a lot of time for the financial institution to evaluate the collateral and approve a business owner for this type of loan. In the meantime, your business could suffer due to a lack of funding.
So, how can you go about getting a loan for a business without collateral? Loans without collateral are called unsecured loans and they are the best type of loan for many business owners. Here are our 5 tips on getting a loan for a business without collateral.
Get Small Business Loans from Alternative Lenders
As we mentioned, financial institutions are pretty rigorous when it comes to approving business owners for a secured loan. But they are even more stringent when it comes to small business loans that do not require collateral. These loans come with more risk for the lender, so a traditional financial institution will only give this type of loan to a business owner with strong personal credit and a detailed business plan. And regardless of your credit score, most traditional financial institutions require collateral for the first loan and only offer unsecured loans after you have paid back at least one secured loan.
Getting a loan for a business without collateral is a lot easier with alternative lenders than traditional financial institutions. Alternative lenders often specialize in unsecured loans and offer a more streamlined approval process. They tend to have lower credit score requirements, which is good news for business owners with a checkered personal credit history.
Pre-Qualify for Unsecured Loans With A High Credit Score
Even with alternative lenders, a high credit score will help you get the type of loan you want. If your personal credit history is good then you can pre-qualify for loans, giving you access to the funds you need faster. You also can choose from a wide range of unsecured loans, including an unsecured line of credit. This type of loan is extremely useful since business owners only have to pay back what they use. That means it can serve as a financial insurance policy for your business.
Bad Personal Credit? Opt for Short Term Loans
If your personal credit history or business’s credit score is not so good, you can still get unsecured loans from alternative lenders. But you might have to take out short term loans instead of longer-term loans like lines of credit. Because the loan program has business owners repaying the loan in a year or less, the risk is lower for the lender. That means that alternative lenders will often approve business owners with poor credit scores for short term loans, even if traditional financial institutions won’t. And the short term loans can help you prepare your business for obtaining a long term business loan.
Retail Companies Can Leverage Merchant Cash Advances
Merchant cash advances give the alternative lender even more confidence that you will be up to repay the loan. These are short term small business loans that are a good option for retail businesses and other companies with a lot of credit card sales who need loans without collateral. Merchant cash advances require business owners to start repaying the loan as soon as they receive it by giving the lender a percentage of the business credit card sales. These loans are easier to manage as a business owner too because as long as you do the math and know you can afford the percentage on the sales you won’t have to do any special budgeting when repaying the loan.
Other Types of Loans that Don’t Require Collateral Upfront
Even if you don’t have any assets to offer as collateral for a secured loan, you can still qualify for a certain type of loan that requires collateral. Known as asset-based loans, these small business loans are used to buy assets for your business that then serve as collateral for the loan. For example, you can take out a loan to buy inventory for your retail business or construction equipment for your contracting business and put up the inventory or equipment as collateral for the loan.
Checking for pre-approval will not affect your credit score.