No Collateral? You Can Still Get a Small Business Loan

The majority of small business lenders will require collateral in order to secure a loan. This is especially disheartening for small business owners who do not have sufficient collateral when they need a loan. 

The good news? Connect2Capital is building a network of specialist lenders who provide loans without collateral—AKA unsecured loans. If you don’t have business assets to cover your financing, you may still be able to get approved for a loan. 

Keep reading to find out everything you need to know about unsecured small business loans. 

What Is Small Business Collateral?

We’re all familiar with collateral on personal loans: your home being collateral on your mortgage, or your car being collateral on your auto loan. Small business collateral consists of using the assets in your business as a guarantee that you will pay back the loan. Small business collateral might be:

  • Property and real estate owned by the business.
  • Equipment and tools used to provide products and services.
  • Inventory and stock that you sell to customers.
  • Accounts receivable and invoices due for payment.
  • Cash savings and deposits held by your business.

A lender will require proof of the value of any small business collateral that you provide.

What Is the Purpose of Small Business Collateral?

Your small business collateral is something a lender will use to guarantee repayment of the money you have borrowed. The process typically works as follows:

  1. You do not follow your repayment schedule and fail to make the required loan payments.
  2. The lender warns you about failing to repay.
  3. You fall into arrears and default on your debt.
  4. The lender seizes the collateral you’ve used to secure the loan.
  5. The lender sells these assets to recoup some or all of the money they have lent to you.

What’s the Difference Between a Secured and an Unsecured Small Business Loan?

Simply put, a secured loan means you guarantee the loan with business collateral, and an unsecured loan means you’re not providing collateral as a guarantee.

Whenever lenders loan out money, they are taking on the risk that a borrower will not pay them back. Collateral helps reduce that risk: business owners will prioritize repayments, as losing business assets can be very damaging.

What Lending Options Do I Have If I Can’t Provide Small Business Collateral?

To start with, are you sure you don’t have any collateral? For example, unpaid invoices or accounts receivable (which most businesses have) can sometimes be used as collateral, especially if you’re using invoice factoring or accounts receivable financing. Likewise, money in your business bank account could be collateralized, or if you have a vehicle for business, you might be able to use that.

If you don’t have enough assets or other ways of securing your loan, you might still be able to borrow money. Depending on the lender, you may have one or more of the following options:

  • Provide a general, blanket business lien against all assets.
  • Provide a guarantee that you will personally repay the loan if the business defaults.
  • Taking out a complete unsecured loan.

What is a General Business Lien?

A blanket lien is defined by the United Commercial Code (UCC). It effectively means that if you default on your debt, a lender can seize any and all assets in your business to repay what you owe. Sometimes a lender will not put a value on a general lien, but agreeing to this does give them the right to sell business assets and property to recoup their losses.

What is a Personal Guarantee?

A personal guarantee means that if your business cannot afford to repay the loan, the business owner (you) will repay the loan from your private finances and assets. This could mean making payments from your own bank account, selling off property and real estate, or making other concessions to repay the loan. In some cases, you can have someone else cosign a loan with you, and that signer would also be liable for the loan repayments.

A personal guarantee may also be combined with a lien on a personal asset, which would mean a lender could seize some of your personal assets if you were to default on the personal guarantee.

Please note that the liability protection provided by having a separate business entity, like a Limited Liability Company or a Corporation, does not generally apply to personal guarantees. In other words, you will commit to repaying any business debt, regardless of legal protections provided by your business.

What is a Completely Unsecured Loan?

It’s exactly what it sounds like: A loan you can take out with a specialist lender that doesn’t require you to offer up any assets, liens, or personal guarantees as security. You will typically need to have an excellent personal credit score if you want to borrow money without any other requirements.

Are There Risks with Business Liens and Personal Guarantees?

Yes. A business lien effectively gives a lender full rights to sell anything in your business to get the loan amount back. This will have a big impact on your business success, especially if finances are already tight.

A personal guarantee means your money and assets are on the hook in the event of failure to repay. This can have significant consequences if you need to sell a vehicle, real estate, or other personal assets you rely on.

It’s important to understand your legal commitments before entering into a loan agreement.

Are Unsecured Loans More Expensive than Secured Loans?

They can be. The extra financial risk that a lender is taking on may be reflected in:

  • Higher interest rates than you would get from a traditional loan.
  • Different repayment terms for settling your balance.
  • Up-front fees to get a loan in the first place.

When you apply through our partner network, you will get all the information you need to make the best decision for your business.

How Can Connect2Capital Help?

We believe that every business deserves access to responsible lenders providing reasonably priced loans, regardless of your circumstances. Our lending network provides a wide range of small business loans, including unsecured lending. 

Webinar: Writing a Business Plan

If you are applying for financing, a solid roadmap becomes especially important as it is the best way for a lender to get a feel for you and your business.