Lending options for startups without collateral – Forbes Advisor

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Starting a business can seem like a catch 22 situation. Often, lenders won’t give you a business loan unless you can offer collateral — an asset they can take back if you default. Given the high start-up costs, however, entrepreneurs usually need financing to get started.

Business loans that do not require collateral are ideal here. While it’s easier to get one as an established business, it’s not impossible. If you spend a little more time creating and executing a plan, you’ll likely be able to get the funding you need.

What are unsecured business loans?

It’s difficult to convince a lender to give you money for a business venture. More often than not, they want to see a proven track record of strong and consistent income. Without that, you’re a riskier applicant.

Lenders sometimes require collateral to reduce the risk of a loan transaction. This means that if there is a default, they can seize the collateral — whether it’s a bank account, business inventory, real estate, etc. — to recoup their losses.

But with an unsecured business loan, you can get financing that doesn’t require collateral. However, keep in mind that lenders usually have stricter qualification requirements and impose a personal guarantee since the loan is not backed by business assets.

How do unsecured business loans work?

Unsecured business loans help companies make large purchases and cover the costs of doing business. Funds are generally paid out as a lump sum that can be used for a specific purchase or cash flow management and then repaid with interest. However, there are other types of small business loans — like lines of credit, merchant cash advances, and bill financing — that can be used to access cash faster and on-demand.

Personal guarantee request

When you apply for an unsecured business loan, you are usually expected to sign a personal guarantee for the loan. This isn’t quite the same as pledging property for a secured loan, but if you default on your payments, the lender can demand your personal assets to cover your debt.

Lending options for startups without collateral

If you’re starting a new business from scratch, you probably need a bunch of cash. Here are some of your unsecured business loan options:

SBA loans under $25,000

If you only need a small amount of seed capital and you’re not in a hurry, a US Small Business Administration (SBA) loan for less than $25,000 can be a viable option.

This type of loan generally offers the most business-friendly terms with lower interest rates compared to other loan options. That’s because a portion is guaranteed by the SBA. So if you default, the lender may be able to recoup some of their losses directly from the government.

SBA loans come in all shapes and sizes. Collateral is usually required for large loans. But if you’re applying for a standard SBA 7(a) business loan, you probably won’t need to post collateral for loan amounts under $25,000. However, you and any other owners with a 20% or more interest in the company must personally vouch for the loan. This means you have a legal obligation to pay back what you borrowed with your personal assets if the company doesn’t.

Online Startup Loans

Traditional financial institutions may not be as friendly to startups, but that doesn’t mean other lenders aren’t. It’s relatively easy to find loans specifically geared towards new startups, often from smaller online lenders. Like other forms of alternative small business finance, online startup loans tend to be expensive, so you need to carefully consider this in your business plan.

Cash Advances from Merchants

When you take out a merchant cash advance (MCA), you get a lump sum up front, just like you would with a loan.

However, instead of paying it back with interest in regular payments over time, you agree to a factor rate that determines the total amount you pay upfront for the loan. You then pay it back as a percentage of your credit card transactions – this is called the holdback percentage. These payments are generally made much more frequently — sometimes even daily — than with a typical loan, and you continue to make them until your advance amount is repaid in full.

For example, if you borrow $10,000 at a factor of 1.25, you pay the lender $12,500 ($10,000 x 1.25) in total. If you agree to a 10% retention percentage, you’ll pay your lender 10% of all your daily sales until you pay back the full amount (the $10,000 you borrowed plus the $2,500 financing fee).

Because your payment amount scales according to your sales, it’s a particularly good option for businesses with seasonal income fluctuations or new startups that can’t commit to a specific monthly payment amount. However, since there is no defined term, you cannot simply calculate an equivalent annual percentage rate (APR) and compare it to other borrowing options. However, they are usually more expensive than normal business loans.

Alternatives to unsecured business loans

Many businesses need multiple sources of financial support to get started. You may need to cobble together several types of seed funding. Here are a few other ideas:

equipment financing

Device financing works similar to car financing. When you take out a car loan, it’s secured by the car you’re buying, meaning you don’t need to have any collateral in hand before you can get the loan. Similarly, many small business lenders offer secured loans in the form of equipment financing, with the equipment you purchase serving as collateral for the loan.

While this type of loan won’t necessarily cover your storefront, business inventory, or labor needs, it can be a good option if you need equipment to get started.


If you have a strong social network, crowdsourcing is another option to raise the funds you need to start your business. This obviously won’t work for everyone; You wouldn’t expect to start a new biomedical company by setting up a fundraiser on Kickstarter, for example. But if your business is relatively small, it might be a good choice.

Personal Savings

Many people also use their own personal savings to start their business. It can be tempting to plunder your emergency and/or retirement savings as these are probably the biggest buckets at your disposal; However, think long and hard before doing so. Make sure you have a plan of what to do if you lose that money.

It’s also a good idea to work with an experienced small business accountant who can advise you on the most tax efficient way to start a business and write off your personal investments in the business.

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