If you want to apply for a business loan from a bank, credit union, or alternative lender, you’ll be more likely to get approved if you’re organized and ready to answer questions about your assets. After all, one of the most important portions of the business loan application is collateral. Before applying, we suggest learning how to get a loan without collateral and using it, so you are aware of your financial options. In this post, we’ll help you determine if you’ll need collateral to secure a loan, or if you could qualify for an unsecured business loan. Getting a business loan without assets is possible, but it’s important to weigh your business financing options and overall situation first!
I Have Collateral Assets to Use:If you have collateral assets, that’s great news because the business loan lender is more likely to approve you for a larger loan amount. Collateral assets include:
- Real estate property
- Business inventory
- Cash savings
- Other physical items – anything that has a title that the bank can take over from you.
The Pros of Submitting Collateral Assets:
- You’re likely to be approved for almost any type of business loan in any size you ask for, if it’s in proportion with your assets. You'll be more likely to receive a loan offer than if you have poor credit without collateral to offer.
- You should confirm your asset worth with a secondary opinion from an appraiser. This is important because you should know exactly how much everything you’re offering the lender is worth. Have detailed records ready for the bank to review. Account for everything they could possibly ask, and you’ll look extremely polished, which is always a great sign to the funder.
- Most likely, you’ll get a low-interest rate loan, but that doesn’t mean smooth sailing of course, but getting affordable loan terms and rates means one less thing for you to worry about.
- You’re in a wonderful position to negotiate, especially if you’re a larger or highly credible small business. You’ll be able to get yourself an even lower interest rate and can change your repayment terms to something you’re more comfortable with.
The Cons of Submitting Collateral Assets:
- Banks prefers tangible items because they can be easily repossessed if you default on the loan. Due to this, having collateral assets benefits the bank, because they have another way to get repaid if you don't make loan payments.
- Your personal life could be affected by the bank if you don’t pay back your loan or business line of credit on-time. For instance, if you submit your house as collateral, you could be put in a horrible position if the bank seizes your collateral.
- Your undeveloped plot of land doesn’t count as collateral. Banks literally call this type of ownership “dirt” because your property must have a standing structure built on it.
I Don’t Have Collateral Assets to Use:If you don’t have collateral assets to use to secure a small business loan program, don’t worry! Although you won’t be approved for a multi-million-dollar loan, you likely don’t need that large of an amount anyway. The important thing is to prepare yourself with much more information to give the bank.
Pros of Not Having Collateral Assets:
- The bank will look at all aspects of your business: your company history, personal and business credit scores, credit history, revenues, balance sheets, equity contributions, and more.
- Your personal credit and cash savings will boost your likelihood to receive the unsecured loan amount that you’re requesting. That’s assuming your credit is consistently high and that you have a sizable amount of cash savings. It might also help if you’ve previously received another type of loan, like a personal loan or auto loan, and have successfully paid them off.
- Like the point mentioned above, organizing whatever documents you have makes an incredible first impression. The organization aspect is especially important for small businesses, who must prove themselves to financial entities like banks.
- Your mortgage could serve as collateral if you don’t outright own your house. This is a huge risk to take. So, if you’re unsure about your business plan, it is worth your time to meet with a business advisor before getting a business loan.
- If you land a huge contract, it will count as collateral. If you need the business loan to fulfill the big contract successfully, the bank will consider the contract as an asset.
- Maybe you don’t even need a bank to receive funding, and instead could pursue peer-to-peer lending. You may want to go this route due to lack of red tape, need for collateral and co-signers, among other reasons. Other options include Small Business Administration (sba loans), business credit cards, lines of credit, and merchant cash advances.
Cons of Not Having Collateral Assets:
- You may still need collateral or even a co-signer, especially if own a small business. This will depend on the lender and their leniency, plus the company details we mentioned above.
- Be careful with what you ultimately use as your alternative collateral. There is always the risk for failure, and you should be ready to say goodbye to whatever collateral you’re using to gain the loan.
- Owning a limited liability company (LLC) won’t save you. The bank will still come after your personal assets. Don’t assume your LLC will save you from anything without consulting your financial advisor and lawyer first.
- If the bank doesn’t have collateral requirements, you will probably be offered a high-interest loan. If you think you can wait a year for the loan, spend 12 months building up your assets and credit and apply for a much lower interest loan. Beware of others’ experiences with these types of banks too; your time will be well-spent researching the institution’s reputation among other business owners.
- You may have to sign a personal guarantee which means you’re confirming that you’ll repay your debts and will be held personally responsible if you don’t.