When you need funding for your business, the first options that often come to mind are bank loans and asset-backed loans. But what if these options are not available? What if you do not have the assets to secure your loan? That’s when collateral-free loans should be considered. These are loans that do not require collateral/security and still help fund your business.
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. While 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; as an individual, you 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, a blanket lien may be placed on your business even without your knowledge. In actuality, all loans are, in fact, secured in some form or another. However, if what you’re looking for is a loan that provides the funds you need and without needing to pledge any asset or property, you may want to 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. Instead of needing to provide an asset in exchange for a loan, the SBA’s 7(a) loan program provides collateral-free loans that are most suitable for small business needs.
It is important to note that qualifying for SBA loans may be more challenging too, given its higher credit score requirement, along with other factors. Another potential 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. Because of the advantages of taking out a collateral-free loan, an SBA loan should still be considered during the process of your your financial planning.
Merchant Cash Advances
This is a type of cash advance where a financing company provides you with your requested funds. 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. There are both advantages and disadvantages to a merchant cash advance: 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 a fixed interest rate can be financially and emotionally beneficial to the borrower.
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 and remain diligent about your repayment plan.
Business Credit Cards
Credit cards can be a great way to finance your business. They are good alternatives to traditional loans if managed responsibly. Several business credit cards come with an introductory 0% APR offer. If used prudently, this option can be very beneficial. However, these introductory offers eventually come to an end and the APRs after this period may be very high. Using a business credit card effectively requires a keen understanding of specific terms and conditions.
Also read: Are Collateral Loans a Good Idea?
When you’re in need of funding, first ask yourself why you’re looking for a collateral-free loan. 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 are worried about defaulting and having your property or assets seized, then it’s better not to borrow at all- because defaulting is never an option. Never take a loan that you don’t intend to repay!