Can you get a business loan without collateral?
Starting your own business is often a difficult venture.
Asking a lender for a business loan may not always pan out, especially if you’re a new or young small business owner who may not hold many assets.
But everyone has to start somewhere! With the right knowledge, even young entrepreneurs can get the business financing that they need through various lender channels.
In this article, we will discuss how a traditional lender determines if you qualify for a secured business loan — specifically the concept of collateral — and if it’s a necessary prerequisite to fund your business.
What is collateral?
When you fill out a traditional loan application, the lender usually looks for a few key indicators: your total collateral, your credit score, your credit history and your ability to repay the loan in a timely manner.
Collateral can be described as a personal asset held by the borrower that can act as security for a loan. Anything of high value that you own could be considered an asset. Different types of collateral may include:
One of the most high value purchases that you might make in your lifetime is a piece of property. Since real estate is often worth more than the value of a small business loan, many conventional lenders feel much more comfortable approving your application knowing that you have a piece of property to back it up.
When undergoing the loan application process, lending institutions will quite often ask you to reappraise your home to pinpoint exactly how much your property is currently worth. A house that you purchased in 2010 for $400,000 may be worth twice that now, increasing the amount of collateral you have.
Additionally, some institutions, like banks, may only lend you a certain percentage of your collateral to cover any potential losses. For example, if you use your aforementioned $800,000 house as collateral, a bank might only offer you $600,000 at most for a business loan. Your home’s value can influence, but is not directly equal to, the amount a financial institution will provide.
Inventory and pieces of equipment
Many companies sell different products to make their money. In fact, many businesses take out loans to create these products for the market. Along the way, they might also apply for business loans to buy commercial or industrial equipment, which can speed up the process and churn out even more pieces of inventory. Put together, the value of all of these business assets can add up, making them a good choice to use as collateral.
If you’re running a ceramics workshop, for example, the kiln, the pottery wheels, the clay drying machines and even the art itself could potentially be used as collateral on a business loan.
Cash is the most liquid asset out there, so many lenders like to include it into their loan calculations. Unlike with property or any other type of asset, a lender doesn’t have to do anything extra to get the value of your cash — they can just take your savings if you default on your loan.
Why is collateral needed?
Business loans are usually for large amounts, which means that the lender takes a risk by offering funds to borrowers. If a borrower can’t pay that large sum of money back, the lender immediately loses out on that amount — as well as any potential money that they could have made by investing it in other places.
This is why lenders often check that a loan applicant has assets worth more than what they are lending out before approving a traditional term loan. In the event that a borrower defaults on their loan, lenders can claim those assets and sell them to recuperate any of their losses.
What is a personal guarantee on a business loan?
Traditional lenders usually do not budge much when it comes to an applicant not having enough collateral. However, in cases where your assets slightly fall short, lenders may ask you to sign a personal guarantee to ensure that they can get their money back.
A personal guarantee is a legal promise made by you, the lender, that states that you are personally responsible for any balances that are left unpaid by the end of the loan term. This could put a lot of pressure on you, especially because you are now on the hook for any potential financial deficits in the future.
What is an unsecured business loan?
Loans backed by collateral aren’t the only types of loans that a lender can offer. While it remains one of the most common loan types used by institutions, secure business loans can often be out of reach for many businesses that are just starting out or younger owners who are still building up their credit score. In those cases, consider opting for an unsecured business loan instead.
An unsecured business loan is a type of loan that doesn’t require collateral from its business owner to obtain financing. Instead, lenders may require a personal guarantee or more restrictive loan terms for repayment.
UnLock can help finance your company
As an online alternative lender, UnLock offers a number of collateral free loan types that can help you finance your company’s needs. UnLock has helped fund multiple SMEs throughout Australia.
If you’re looking for an unsecured loan or alternative financing options, UnLock does not require assets like home or other real estate as a collateral asset, making it easy for various business owners to take out a startup loan and begin their operations right away.
Looking for more information? Visit the UnLock website and fill out a loan application today!