However, many of our best business loan lenders now offer collateral-free business financing, basing approval on factors like your credit history, revenue, and time in business. If that sounds up your alley, read on to learn the ins and outs of business loans with no collateral.
Key Insights
No-collateral business loans don’t require you to pledge collateral to get approved.
Popular options include term loans, lines of credit, SBA 7(a) loans, and business credit cards.
Lenders evaluate borrowers based on time in business, annual revenue, and personal credit scores.
These loans can offer faster access to funding than secured loans but may have higher costs.
What Are No-Collateral Business Loans?
No-collateral business loans provide funding for business expenses without requiring borrowers to pledge specific assets as security. Instead, lenders base approval on factors such as annual business revenue, time in business, and credit.
As a result, if you default on a business loan, your lender won’t have collateral, and it can seize and sell to recover its losses. However, some lenders require a Uniform Commercial Code (UCC) lien or personal guarantee instead, which can give them the rights to assets in the case of a default.
Collateral Vs. Liens Vs. Personal Guarantees
Business lenders use different methods to minimize their risk in lending, including requiring collateral, liens, or personal guarantees. Here’s a closer look at each and how they differ:
Collateral: Collateral is a specific asset a borrower is required to pledge to secure a loan. If the borrower defaults, the lender can seize and sell the collateral to recover the debt. For example, a vehicle serves as collateral on an auto loan.
Liens: A lien is a legal claim against property to secure the payment of a debt. For example, UCC liens are typical in business loans. It gives lenders the right to all of a business’s assets in the event of a default. While collateral involves a lien, not all liens involve collateral.
Personal guarantees: Personal guarantees require an individual to agree to be responsible for a business debt if the business defaults. If the individual doesn’t pay, they can face collections, credit score damage, and even being sued.
While no-collateral business loans don’t require you to pledge a specific asset, some may require a UCC lien or personal guarantee. The requirements vary by lender and loan type, so remember to read the fine print.
Best Types of No-Collateral Small Business Loans
No-collateral small business loans come in several forms, each offering unique benefits. Here are four of the most common and popular options.
1. Business Term Loans
No-collateral business term loans provide an upfront lump sum that you repay through fixed installments over a set period. The costs typically include interest according to a fixed annual percentage rate (APR) and possibly a fee, such as an application or origination fee.
These can be a good fit if you need a large lump sum to cover multiple business expenses and prefer a fixed, predictable repayment plan. However, a line of credit can be cheaper initially and only charges you interest on credit amounts you use.
2. Business Lines of Credit
No-collateral business lines of credit provide revolving funds you can withdraw, repay, and use again. Interest charges apply only when you draw from the credit line, usually at a variable rate. Lenders may also charge additional fees, such as annual or monthly service charges.
Your credit line remains available as long as the lender permits, requiring only minimal monthly payments during the draw period. When the line closes, you'll need to repay any remaining balance—either through a balloon payment or an arranged payment plan.
Business lines of credit work best when you need flexible borrowing amounts or staged funding. While they offer lower monthly payments, they lack the predictable repayment schedule of a traditional term loan.
3. SBA Loans
The United States Small Business Administration (SBA) offers a variety of government-backed loan programs for small business owners. Two of those—SBA 7(a) Small loans and SBA Express loans—don’t require collateral for loan amounts of $50,000 or less.
| SBA 7(a) Small Loan | SBA 7(a) Express Loan | |
|---|---|---|
| Financing type | Term loan | Credit line |
| Guarantee rate (paid to lenders) | 85% | 50% |
| Maximum term | 60 months | 10 years |
| Maximum interest rate | Base rate + 6.5% | Base rate + 6.5% |
These SBA 7(a) loans can be a good fit if you have various business expenses you want to finance. They’re versatile while offering relatively low interest rates and long repayment terms.
However, the time to funding can be more lengthy. Plus, it requires detailed financial documentation and approval from both the SBA and your chosen lender.
4. Business Credit Cards
Business credit cards function like personal cards, offering revolving credit you can access with a swipe or tap. These typically unsecured credit lines let you repeatedly borrow and repay while financing everyday business expenses.
You'll only need to make minimum monthly payments on your balance. However, carrying balances from month to month incurs variable interest charges. Some cards also come with annual or monthly fees.
Getting a business credit card can be a good fit if you want to cover miscellaneous expenses on an ongoing basis. However, 0% APR introductory promotions aside, they tend to come with higher interest rates than the previous loan types.
How to Qualify for a No-Collateral Loan
The eligibility requirements for a no-collateral loan depend on the lender you choose and the type of business loan you want. However, lenders often check the following:
Business credit history: One or more of your business credit reports to see if you’ve paid past credit accounts on time.
Personal credit history of owners: One or more of your personal credit reports to see how you’ve managed your credit accounts and if you meet their minimum personal credit score requirements.
Time in business: How long you’ve been in business. Many have minimum requirements, such as six months to a year.
Annual business revenue: How much you make in annual revenue. Many lenders have minimum requirements.
Average monthly business revenue: Your business’s average monthly revenue trends to ensure business is going well.
Debt-service coverage ratio: Your business's debt obligations to determine how much income is available to cover the loan payments.
Industry type: Industry type. Some lines of business present more risk to lenders than others.
Business plan: Your business plan to assess potential risks and earnings, especially for newer businesses.
Location: Your business’s home address. Most lenders require you to be located in the US.
Business checking account: An open, active bank account.
Below are examples of requirements from a few popular business lenders. As you can see, they vary quite a bit from one to the next. Finding good-fit lenders for your unique situation is key to getting approved with competitive terms.
| Biz2Credit Term Loan | Lendio Term Loan | Fora Financial Loan | |
|---|---|---|---|
| Minimum time in business | 18 months | 6 months | 6 months |
| Minimum annual revenue | $250,000 | $50,000 | $240,000 |
| Personal credit score | 650 | 600 | 570 |
Pros and Cons of No-Collateral Business Loans
No-collateral business loans offer both benefits and drawbacks, making it important to weigh the pros and cons before deciding if one is right for your business.
Pros
- Fast approval process: Lenders can often process applications faster because they don’t need to evaluate collateral, sometimes providing funds as soon as the same day.
- Versatile: The loan funds can often be used for a variety of business expenses, not just one.
- Wide availability: You can find no-collateral loans in many forms and from many lenders
Cons
- Higher interest rates: Lenders often charge higher interest rates on unsecured loans than on secured loans which can increase your costs.
- Lower loan amounts: You may qualify for higher loan amounts through collateral loans.
- Stricter approval requirements: Borrowers typically need at least a fair-to-good credit score, steady revenue, and solid financials to qualify.
Tips for Securing a No-Collateral Business Loan
- Review the common requirements: For example, check your personal and business credit reports, assess your revenue trends, and calculate your time in business.
- Assess your budget: See how much you can comfortably allocate towards monthly loan payments. Additionally, identify the business expenses you plan to cover and estimate the amount you’ll need to borrow.
- Explore your options: Business lenders offer a variety of loan products with different eligibility requirements. To secure a competitive deal, research lenders, shortlist the best fits, and collect quotes to see where you can get the most favorable terms.
Common Mistakes to Avoid
Lastly, as you start your search for a loan, try to avoid these common mistakes:
Overlooking fees or unfavorable loan terms: Carefully review loan offers. Ensure you fully understand the interest rate, repayment terms, fees, monthly cost, and overall cost. You don’t want any surprise costs down the road.
Borrowing more than you need: Borrowing too much can strain your ability to repay the amount and result in unnecessary costs. To avoid it, research your expenses so you can accurately estimate your funding needs.
Committing to out-of-budget payments: Identify the maximum amount you can afford to spend per month on loan repayments and make sure you stick to it. Overcommitting can hurt your cash flow and put you at risk of default.
Borrowing for expenses that don’t generate ROI: Using business loans for non-essential items like luxury office decor or lavish events strains finances without generating returns. Always evaluate if purchases will improve your company's financial position.
Not shopping around: If you don’t shop around, you can end up overpaying or settling for a less-than-ideal loan. Be sure to compare at least three quotes.
Other Financing Options for Small Businesses
No-collateral loans can be a great fit for many small business owners, but they aren’t your only option. Other financing paths to consider include:
- Invoice financing: Lenders lend you the amount equal to an outstanding invoice for a fee and you repay it when your clients pay you.
- Revenue-based financing: Also known as merchant cash advances, lenders purchase your future sales at a discount and you repay the amount through a fixed percentage of your receivables.
- Collateral loans: Lenders provide a loan secured by an asset, like real estate property, a vehicle, or a piece of equipment, often resulting in lower interest rates and higher loan amounts.
- Crowdfunding and peer-to-peer lending: Businesses raise funds from individuals or investors online, often in exchange for rewards or interest-based repayments.
- Grants: Free funding awarded by governments, corporations, and nonprofits to support specific projects or initiatives.
- Angel investors: Angel investors provide funding in exchange for equity.
- Vendor and supplier financing: Vendors and suppliers allow you to defer payments for goods and services, helping with cash flow management.
Conclusion & Next Steps
No-collateral business loans offer funding without pledging assets as security. While secured loans like commercial real estate or auto loans may offer better terms for specific purchases, unsecured loans can be ideal for diverse business needs like marketing, inventory, and working capital. To explore your options, follow the steps above to prepare and request online quotes.
