Business LoansUnsecured Business Loans: How to Get Collateral-Free Financing

Startup Business Loans No Collateral: What Are Your Options?

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If you’ve ever tried to get a secured business loan before, you may have been asked to provide collateral. Putting up collateral to obtain a loan can be a risk for you as a borrower since you may be asked to use high-value equipment, inventory, or even physical property as collateral. The lender can legally seize your collateral if you are unable to repay the loan.

An alternative option would be to get an unsecured business loan for your startup. With an unsecured loan, business owners can be approved based on other factors like their credit scores, lengths of time in business and annual incomes.

Unsecured business loans have become more of a viable option for startups. This is largely because of the increased presence of flexible online lenders and options such as lines of credit and microloans.

Getting a startup loan with no collateral

Starting a business isn’t cheap, so you may need a loan to cover various costs like hiring employees, buying equipment, renting a space, etc. An unsecured business loan means the loan isn’t secured by collateral, which can be an important valuable asset.

Therefore, if you happen to default on an unsecured loan, you won’t lose your house, car or whatever you would have put up for collateral.

Since this type of small business loan isn’t guaranteed by any collateral, it’s usually considered a bigger risk for lenders. This is why you may notice that unsecured loans tend to have higher interest rates than secured loans. The lender is covering themselves with plenty of interest payments from you in the case that you are unable to pay back the full loan price.

That said, unsecured business loans for startups can still be a solid option. If you don’t have any valuable collateral in the first place or have a good credit score, you can still benefit from using this type of loan. There are many different options and you can borrow a smaller amount of funds to cover only your immediate needs, or get access to a line of credit to use when necessary.

If you are able to make payments on time and perhaps even pay off your unsecured loan a little early, the benefits could definitely outweigh the cons.

If you’re thinking about getting an unsecured business loan for your startup, there are three main types you can consider.

Option 1: Unsecured lines of credit

An unsecured business line of credit works similarly to a home equity line of credit (HELOC), only your house and other valuable assets are not on the line as collateral.

This is a term loan, so you’re able to borrow on an as-needed basis for a specific term, and then you have to pay back that amount plus interest. Borrowers usually get approved to borrow $10,000 to $100,000, but can also borrow as little as $5,000 or as much as $1 million.

An unsecured line of credit is flexible, and you can use it for practically any business expense that you planned or didn’t plan for.

Some business owners like this method better over receiving a lump sum payment. There’s always a chance you could have overestimated costs or could end up borrowing extra money to serve as a cushion should you need it. Why not just borrow only what you need so you’re not stuck paying more interest on a higher loan? There’s also a chance that you could have underestimated costs, so an unsecured business line of credit can come in handy there as well.

To get approved for this type of loan, lenders will look to see if your business has a positive cash flow, good credit history, and is projected to keep earning money in the future. These factors will help indicate how likely it is that you will repay the loan with no problems.

Similar to traditional loans, a business line of credit may come with fees like a maintenance fee or draw fee depending on the lender. It’s best to identify and discuss any of these fees with the lender before you accept the loan terms.

Option 2: Merchant cash advance

If your business is already making money, a merchant cash advance might be an option worth considering. A merchant cash advance isn’t actually commonly referred to as a loan, but rather a cash advance based on the payments you plan to receive.

You can use the advance for business expenses like buying new equipment, expansion, vendor bills, or even emergency funding.

Merchant cash advances are quicker ways to borrow unsecured funding for a business, and lenders like OnDeck Capital can approve them in as little as 24 hours. The company providing the merchant cash advance purchases an amount of card receivables from the business at a discount. In addition, they also receive a small percentage of the owner’s future receivables, which is called a holdback. A holdback between 10 to 20 percent is common and can be fixed until the advance is repaid.

To qualify for a merchant cash advance, you don’t need a perfect credit score. Some lenders will approve you with a minimum score of 500. However, you will need to meet annual revenue requirements and have been in business for at least a full year.

A merchant cash advance would be best for a business owner who gets a lot of card transaction receivables regularly so they can repay the advance quicker.

The fees are higher than other types of unsecured business loans, so you’ll want to make sure the costs make sense for your business first.

Option 3: Business credit cards

When you compare business loans to business credit cards, you may find that business credit cards have fewer requirements and lower interest rates. Most importantly, they can be used as a short-term unsecured business loan.

Business credit card rates range from approximately 10 to 24% depending on your credit history. Some cards offer a 0% introductory APR for a few months so you can finance expenses for your business with interest charges for a fixed time period.

For example, if your card has a 15-month 0% introductory APR, you can make a charge and have more than a year to pay the bill off interest-free. Your application for a business credit card will be assessed based on your creditworthiness total income.

You don’t have to have a specific type of business to qualify since startups, freelancers, sole proprietorships, partnerships, S corporations and LLCs may all be approved for a business credit card.

It’s important to keep in mind that some business credit cards to come with high annual fees. If you don’t pay at least your minimum monthly payment on time, you will be charged a late fee plus interest depending on your APR.

You also have to be mindful that borrowing an amount too close to your credit limit or maxing out your card can have a negative effect on your credit score.

Still, a business credit card can be a simple way to borrow money for your business without having to put up collateral. Unlike a business line of credit, you can continue borrowing money and paying your bill for as long as you want.

Who an unsecured business loan makes sense for

Unsecured business loans can be attractive to business owners who don’t have any collateral or don’t want to put any assets up for collateral to obtain a secured business loan.

You also may not have time to wait around for approval for a secured business loan. With unsecured business loans, you can get approved faster, and there are more options for short-term borrowing. If you already have some cash flow and don’t need to borrow hundreds of thousands of dollars for your business, an unsecured loan would be a great fit. Even though interest rates tend to be higher, it may not make that much of a difference if you take out a smaller loan and pay it off quickly.

The bottom line

If you don’t have collateral, you can still get funding for your business. You have several options when it comes to choosing the right unsecured business loan for you.

However, it may be difficult to qualify if you are trying to start a business and don’t have much of a track record or any capital to work with.

You can’t pay business credit card bills or even get approved for a card if you don’t have any business income. This means you have to have something to work with, but the same goes for a secured business loan. With a good credit score and a stable business, you can reap the benefits of getting funding fast with an unsecured business loan for your startup.


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