When you want to fund your business, bank loans and asset-backed loans are the options that probably come to mind first. But what if these options are off the table? What if you do not have the assets to secure your loan with? That’s when collateral-free loans come into the picture. These are loans that do not require collateral/security.
Are all collateral-free loans unsecured?
Collateral-free loans are also popularly known as unsecured loans. However, there are no loans that are truly unsecured. Although you may not be putting up an asset as collateral in this type of loan, your loan is secured in other ways such as a personal guarantee or a blanket lien.
A personal guarantee is a form of security, where you as an individual take responsibility for your business’s debt in case of default. A blanket lien, on the other hand, gives the lender the right to seize any of your assets in the event of nonpayment. When you take out collateral-free loans blanket liens may be placed on your business even without your knowledge. So the truth is that all loans are secured in some form. However, if what you’re looking for is a loan that provides the funds you need, without having to pledge an asset/property, consider these options:
These loans are very affordable and as good as traditional bank loans. But not all SBA loans are collateral-free loans. There are some loans under the SBA program which require collateral. But SBA’s 7(a) loan is what you should be looking at. This program provides collateral-free loans that are most suitable for small business needs.
Although it is not so easy to qualify for SBA loans given its tough eligibility criteria and credit score requirement, this is one option you should consider before you look for loans elsewhere. Another downside to SBA loans is that the processing time is usually long, and may not be the right choice if you’re in urgent need of funds.
Merchant Cash Advances
This is a type of cash advance where a financing company provides you the funds you need. You are then required to repay the amount with a predetermined percentage of your daily credit card sales. This essentially means that the financing company is purchasing a portion of your future sales. This option has its pros and cons. While you may receive the much-needed funding for your business at the right time, this is one of the most expensive loan options you will come across.
Online Term Loans
Collateral-free loans also come in the form of long-term or short-term loans offered by lenders online. Long-term loans typically range between 2 and 5 years. These loans are repaid in the form of monthly installments and carry a predetermined interest rate. They may not be as affordable as SBA loans but they are your closest bet.
Short-term loans, on the other hand, are much more expensive. They come with a short repayment period ranging from 3 to 18 months. While they are very easy to obtain, they involve daily or weekly payments and may affect your business’s cash flow. So if you’re considering this loan, proceed with caution.
Business Credit Cards
Credit cards can be a great way to finance your business. They are good alternatives to traditional loans if handled well. Several business credit cards come with an introductory 0% APR offer. If used prudently, this option can be very beneficial. However, these introductory offers come to an end sooner or later and the APRs after this period may be very high. To understand the terms and conditions of your business credit card to make the most of it.
Also Read: Are Collateral Loans a Good Idea?
When you’re in need of funding, first ask yourself why you’re looking for collateral-free loans. If it’s only because you do not have the asset to put up as collateral, then go ahead. But if it’s because you’re worried about defaulting and having your property/assets seized, then it’s better not to borrow at all- because defaulting is just not an option. Never take a loan that you don’t intend to repay!