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How Do You Get a Small Business Loan Without Collateral?

How Do You Get a Small Business Loan Without Collateral?; If you don't have collateral, is it still possible to get a small business loan? Learn more from Lantern by SoFi.
Susan Guillory
Susan GuilloryUpdated August 17, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
When your small business takes out a loan, how does the lender know you’re going to pay it back? There are a number of ways. In certain situations, when you apply for small business loans, you’re required to provide what’s called collateral. Collateral is an asset of value that, should you fail to repay the loan, the lender can seize (and sell) to recoup their losses. When you put up collateral, the bank or lender you’re working with sees you as less of a risk when it comes to paying back the loan. Not all loans require collateral, however. Read on to learn why that is, what situations might require you to provide collateral, and how to get a small business loan without collateral, if you qualify.

How Do Traditional Loans with Collateral Work?

No matter where you apply for a small business loan, the lender will look at how much risk you present. One indicator of that level of risk is your credit score. If your business or personal scores are low, it indicates that you may not always have been financially responsible in the past. Maybe you’ve taken on more debt than you could afford. Maybe you’ve missed credit card bills. Maybe you have a bankruptcy on your record. All of these may concern a lender, since it is primarily focused on the likelihood that you will repay the loan.Because of that concern, some loans may be secured, meaning that they require collateral. Unsecured loans, by contrast, don’t require collateral. Collateral is typically an asset that you own. When you put it up as collateral, you are agreeing that the lender can seize it if you are unable to pay your loan. The lender can then sell this asset to cover what you owe.Some examples of collateral that small businesses may have include:
  • Heavy machinery
  • Equipment
  • Real estate
  • Cash 
  • Securities (e.g., treasury bonds, stocks, or certificates of deposit)
  • Inventory 
  • Vehicle
So, let’s say that you’re applying for a $50,000 secured loan. You might put up a piece of heavy machinery you own as collateral for the loan. If you aren’t able to fully repay the loan, your lender has the right to seize that asset to cover the balance of what you owe.Collateral is not a commitment to take lightly. Putting up collateral like critical equipment and real estate you’ve worked hard to get could jeopardize your business. That’s why you might want to learn how to get a small business loan without collateral when it’s possible so that you don’t put your business at risk.

Do Small Business Loans Without Collateral Exist?

Yes, it’s possible to get a small business loan without collateral. But because the lender will face a higher risk when you don’t put up an asset to secure the loan, they will look closely at your credit scores, business history, and annual revenue to determine your creditworthiness and likelihood to repay the loan. Also, because there is higher risk involved for the lender, loans without collateral often come with higher interest rates, shorter repayment terms, and sometimes a personal guarantee (more on that later).

Why Some Loans Require Collateral

Some lenders require collateral because they offer low interest rates. A collateralized loan presents less risk for the lender that it will not recoup its investment in you, so it’s able to be competitive and get your business with a low rate.Other lenders require collateral because they cater to people who might not qualify for other financing by offering bad credit business loans. For businesses with poor or limited credit, an unsecured loan through a bank might not be an option, so they may need to go with lenders that have more requirements in terms of collateral.There are also specific loan types that, by definition, require collateral, such as invoice financing and equipment loans. Invoice financing (and the related invoice factoring) uses the value of the business’s unpaid invoices as collateral, and equipment loans use the equipment you’re purchasing to secure the loan.

How Do Unsecured Business Loans Work?

If you don’t have collateral (or don’t want to put your business assets on the line), it may be possible to get an unsecured loan. In this case, the lender might use the following clauses to lessen the risk of lending you money.

Blanket Liens

As a condition of your unsecured loan, your lender may file a blanket UCC lien on your company assets. This means that, should your business default on the loan, the lender has the right to go after your assets to compensate for any amount still owed. Thus, even if you don’t put up collateral, a blanket lien means the lender can seize assets. However, getting financing with a lien is generally a faster process than getting a secured loan.

Personal Guarantees

Without collateral, a lender may require you to sign a personal guarantee in order to get your business loan. This guarantee means that you agree to repay the loan out of your own pocket in the event that your business defaults on the loan. While you shouldn’t be afraid of signing a personal guarantee, it’s important to understand what it means before you commit to the loan.

Pros and Cons of Getting a Small Business Loan Without Collateral

Small business loans without collateral can have both benefits and drawbacks. Here’s a look at how they stack up.
Pros of Unsecured LoansCons of Unsecured Loans
May have a shorter loan application process. since the lender doesn’t have to assess the assetMay have a higher interest rate than secured loans that require collateral
You won’t jeopardize your business as you would if you couldn’t pay the loan and your assets were seizedYou may not be able to borrow as much as with a collateralized loan
Online lenders may have more relaxed requirements to qualify for an unsecured loanYou may have to sign a personal guarantee
Let’s dig a little deeper into the details. 

Pros of Small Business Loans Without Collateral

There’s more paperwork involved with a loan that requires collateral, plus that asset must be assessed and valued. A small business loan without collateral would typically take less time to process and, as a result, could fund faster.Because you aren’t putting up a key asset (such as your commercial real estate or equipment) for the loan, there’s no risk that you will jeopardize your business by allowing those assets to be seized if you can’t pay the loan. (Of course, you will still have to figure out a way to pay back the loan.)If you choose to work with an online lender, you may have better success at getting a small business loan without collateral than if you apply with a traditional bank.

Cons of Small Business Loans Without Collateral

In researching how to get a small business loan without collateral, you’ll find that it isn’t all roses and sunshine. There are definitely some potential downsides to taking out an unsecured loan.First, these loans tend to have higher interest rates, since they represent higher risk to the lender.Also, the value of the collateral you put up often determines how much you’re eligible for. So without that collateral, you may not be eligible to borrow as much.A loan with no collateral may require signing a personal guarantee or agreeing to a blanket lien, so you can still end up putting assets at risk.

8 Types of Small Business Loans Without Collateral

Here’s a look at different types of small business financing that may not require collateral.

1. SBA loans

Small Business Administration (SBA) loans are often considered the gold standard for business loans because they typically offer the largest amounts and lowest rates. And, since these loans are backed by the government, they can be easier to qualify for than other types of business loans.Some SBA loans require collateral. Others do not. It’s often left to the discretion of the SBA lender to determine whether collateral is required, based on the qualifications of the borrower. However, with the 7(a) program, no collateral is required for loans up to $25,000. For 7(a) loans over $350,000, the loan typically must be collateralized to the maximum extent possible up to the loan amount, according to the SBA. 

2. Long-Term Loans

Long-term business loans are lump sums of capital paid back over a set period of time — typically from three to 10 years. Banks and credit unions may choose to require collateral for long-term business loans at their discretion. With the unsecured loans, however, you may need to provide a personal guarantee, which means that if your business can’t pay back the loan, you personally will have to.

3. Merchant Cash Advance

Another no-collateral business loan option is a merchant cash advance. It’s not technically a loan though. Rather, you’re borrowing against future credit card sales. You pay back the advance (plus a fee) by having a certain portion of your daily or weekly debit and credit card sales automatically withdrawn from your business bank account.

4. Online Loans

If you get a business loan from an online lender, you may not need to supply collateral. Instead, an online lender might require a personal guarantee or, possibly, a blanket lien to reduce its risk. However, online business loans tend to charge higher interest rates and offer less favorable loan terms  than traditional banks.

5. Business Credit Cards

While a business credit card is not exactly a loan, it can serve as a source of no-collateral funding for your business. This is especially true if you are able to get a 0% introductory annual percentage rate (APR) business card. These intro deals often last as long as 12 to 18 months, which could allow you to charge expenses up front, then pay them off interest-free. Just keep in mind that, once the promotional period expires, you may end up paying high interest and fees.

6. Business Lines of Credit

While banks often require collateral for a business line of credit, you may be able to find an unsecured business line of credit from an online or alternative lender. Secured or unsecured, a business line of credit can be a flexible source of funding for newer businesses with limited credit history. You can borrow what you need up to a certain limit. As you pay off the amount you owe, it’s freed up for you to use again when you need it. 

7. Equipment Financing

Equipment financing can be helpful for new businesses that need funding to purchase expensive equipment but can’t (or don’t want to) use other assets for collateral. With an equipment loan, the item you are purchasing acts as collateral. If you default on your loan, the lender will simply seize the equipment to recoup their losses. Your personal and business assets stay safe. 

8. Invoice Financing

Invoice financing (also known as accounts receivable financing) is a cash advance you can get on your outstanding customer invoices. With invoice financing, your invoices serve as collateral, so you don’t have to put any additional assets on the line. With this type of financing, an invoice financing company advances you a certain percentage of your outstanding invoices. They hold onto the remaining percentage and charge fees for each week it takes for your customers to pay up. Once your customer has paid in full, you’ll get the reserve amount back, minus the lender’s fees.

How to Qualify for Business Loans Without Collateral

If you’d prefer to avoid the hassle of collateral — or don’t have enough assets to offer as collateral for the amount of money you need — you still have financing options. You may be able to get an unsecured business loan from an alternative lender. These lenders may also offer a faster, larger loan than a traditional lender could offer with a secured loan. However, they tend to come with higher interest rates and shorter terms because they’re less secured.It may also be possible for you to get an unsecured loan from a bank or SBA lender. But, with no security for the loan, the lender will likely look very closely at your household income, business and personal credit scores, business revenue, business cash flow, and outstanding debt. All these variables will help lenders calculate how likely you are to repay the loan.Recommended: How to Build Business Credit

Check Your Small Business Loan Rate

If you’re curious about what type of small business loan (with or without collateral) you may be able to qualify for, Lantern by SoFi can help. With our online lending platform, you can quickly compare business loan offers from multiple small business lenders matched to your needs and qualifications. 

Frequently Asked Questions

Do startup business loans with no collateral exist?
What is collateral?
How do traditional secured loans work?
Can you get a small business loan without collateral?
How hard is it to get a loan without collateral?
What kinds of loans can you get without collateral?

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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