Many of the most popular and highly-sought small business loan options require collateral, especially if you’re looking for a large loan or are working with a traditional lender like a bank or the Canada Small Business Financing Program. But what if you’re a small business owner looking for funding and you don’t have collateral to secure a loan? Don’t panic—there are a number of funding options available to you that don’t require collateral.
Business loans without collateral are commonly referred to as “unsecured financing”, but this is actually a bit of a misnomer—most business loans with no collateral are secured by some kind of asset. We’ll explain in more detail below. But before we dig in, let’s review what collateral is and why banks and traditional lenders often require it to approve a loan.
What is Collateral?
“Collateral” refers to any asset a lender will accept as security for a loan. Securing a loan with collateral reduces the risk to the lender by providing them with assets they can liquidate if you default on your loan. That means the bank will be able to recoup their costs if you are unable to repay your loan.
Collateral assets can include:
- Real estate
- Equipment or vehicles
- Business inventory
- Cash savings
- Other physical items—anything with a title the bank can take over
Can I Get a Business Loan with No Collateral?
Yes, you can get a business loan with no collateral. There are a number of small business loan options that do not require collateral, which we’ll list below.
Most traditional lenders, including the Canada Small Business Financing Program and banks, will require collateral or some form of guarantee to approve a loan. Alternative lenders, including online lenders like Greenbox Capital®, have more flexible approval requirements and typically do not require collateral.
Business loans without collateral typically come with other conditions and costs. If you are unable to supply collateral, it’s safe to expect that your lender will charge higher fees or interest rates, or approve you for a smaller loan or a shorter term length. You may also be subject to other conditions, such as personal guarantees or UCC liens:
- A personal guarantee is a formal written promise that an individual, usually the business owner, will repay the unsecured debt out of their personal funds if the business defaults.
- UCC liens are blanket liens that allow a lender to attach any or all of your business assets if you default. This means your lender can liquidate any assets associated with the lien if you are unable to repay the loan.
How To Get a Business Loan with No Collateral
Researching your loan options and preparing your loan application carefully are the keys to getting a business loan without collateral. If you’re looking for unsecured financing for your small business, follow these steps:
1. Understand lender types
In 2022, small business funding is available from a number of different types of lenders, including traditional lenders like government funding programs and banks, alternative lenders like Greenbox Capital, and peer-to-peer lending marketplaces.
- Traditional lenders will almost always require collateral or some form of guarantee, such as a personal guarantee or UCC lien. They offer the largest loan amounts, lowest rates, and longest terms, but they also have the strictest approval requirements, highest minimum credit scores, and longest application timelines.
- Alternative lenders typically have more flexible approval requirements and are generally more favourable to businesses that cannot provide collateral, including businesses with lower credit scores. These lenders also have streamlined applications and can even provide funding in as little as one business day.
- Peer-to-peer lending occurs on online P2P lending platforms that connect investors with business owners who are looking for funding. Investors will pool money together to fund the loan, and business owners will pay it back with interest as they would a normal term loan. P2P lending typically does not require collateral, but approval requirements will depend on the loan amount and terms, as well as the policies of the lending marketplace.
Let’s take a closer look at these three options:
|Traditional Lenders||Alternative Lenders||Peer-to-peer Lending|
|Institutions||Canada Small Business Financing Program, banks, credit unions||Direct online lenders like Greenbox Capital or OnDeck||Online lending platforms like Funding Circle, Peerform, or Upstart|
|Loan types||Term loans, real estate loans, equipment loans, business lines of credit||Merchant cash advances, invoice factoring, business lines of credit, alternative term loans||Term loans|
|Loan amounts||Up to $2M||Up to $500,000||Up to $500,000 depending on the platform and business profile|
|Term lengths||Up to 25 years||Typically 1-3 years||Up to 5 years|
|Fees||Typically lower rates than alternative lenders. Other fees will apply depending on the lender.||Rates may be higher depending on your business’s financial history.||Range from 3.50% to 35.99% APR|
|Eligibility||Only businesses with strong financial histories and very high credit scores are approved.||Flexible approval requirements that are based on business potential rather than financial history.||Approval requirements depend on the lending marketplace.|
|Time in business||2+ years||6+ months||Approval requirements depend on the lending marketplace.|
|Approval timeline||Weeks or months||As little as one business day||Within 5 business days|
2. Research loan options
Different types of lenders offer different types of funding. Here are some of the most popular unsecured loan options for businesses without collateral:
- Canada Small Business Financing Program: The Canada Small Business Financing Loan (CSBFL) program is administered by the federal government. These are often considered to be the most desirable form of funding since they typically have the lowest rates, highest loan amounts, and longest terms. Loans up to $1M are available to small businesses, but funds can only be used for purchasing or improving land or buildings used for commercial purposes, purchasing or improving new or used equipment, typically with up to 10 year terms, or urchasing new or existing leasehold improvements. Collateral up to 25% of the value of the loan is required. Start-ups can apply, but applicants must have a very high credit score, and be prepared to supply extensive business and personal financial documentation. Learn more about
- Merchant cash advances: Available from direct online lenders, merchant cash advances (MCAs) are an alternative form of funding known as a purchase of future receivables. MCAs are approved primarily based on your business’s health and potential, with greater focus on your monthly sales and revenue than your financial history. No collateral is required to be approved because the value of your future sales essentially acts as collateral. Learn more about merchant cash advances.
- Invoice factoring: Also available from direct online lenders, invoice factoring is considered a “self-securing loan” because it uses your unpaid invoices as collateral. With invoice factoring, a business essentially sells their unpaid invoices to a lender, called a “factor”, and the factor will advance the business the outstanding amount up to 90%. You’ll receive the rest of the outstanding amount when your client pays, minus any fees. Learn more about invoice factoring.
- Equipment financing: Equipment financing is another form of self-secured financing designed specifically for the purpose of purchasing new equipment. The equipment acts as collateral to secure the loan.
- Unsecured line of credit: Lines of credit offer businesses the most flexibility by allowing them to draw and repay from the line as needed. Lines of credit from traditional lenders will typically require collateral or a personal guarantee, while alternative lenders may not require these conditions. However, you may receive a lower credit limit with higher rates with an unsecured line of credit.
3. Organize your financial documentation
If you don’t have collateral, you may need to work harder to prove that your business is stable and not a liability to your lender. This means having up-to-date financial documentation ready before you apply, including:
- Business and personal credit records
- Balance sheets
- Profit and loss statements
- Cash flow statements
- An overview of business expenses and cash flow
Providing a detailed business plan, forecasted financial statements, and ideally a strong credit history presents a positive impression of your business and can help you acquire unsecured financing.
4. Consider terms and conditions before signing
No-collateral financing will typically have higher rates and fees than secured financing, but different unsecured funding options come with different rate and fee structures, payment schedules, and loan terms. Merchant cash advances, for example, use a factor rate instead of a traditional interest rate. Be sure to compare your options closely, factoring in your business goals, credit history, and financial forecast before you sign a contract.
When To Apply for Business Loans Without Collateral
Depending on how you intend to use your funding, it may make more sense to wait until your business is in a stronger financial position before applying for a small business loan, especially if you’re seeking a large loan amount or loan terms longer than 5 years.
Unsecured loans are ideal for businesses that:
- Cannot offer collateral, but can offer a personal guarantee or UCC lien
- Are seeking smaller loan amounts
- Are seeking shorter term lengths
- Need fast funding to cover unexpected expenses or opportunities to grow
Alternative Business Loans Without Collateral
If you don’t have collateral, alternative funding from direct online lenders like Greenbox Capital can help you access the working capital you need to maintain operations, cover unexpected expenses, and continent to grow your business.
Alternative funding like merchant cash advances offer a number of advantages over financing from traditional lending institutions, including:
- No collateral requirements.
- Streamlined online applications with less paperwork and less rigorous approval requirements.
- Faster processing and approvals, with funding available in as little as one business day in some cases.
- More flexibility and more room to negotiate terms.
Many types of alternative funding are available to businesses who need funding quickly, don’t meet the strict criteria of government funding programs and other traditional lenders, can’t provide collateral, or would prefer not to seek funding from friends or family members. With funding from as little as $3,000 up to $500,000, business owners can access alternative funding that suits their unique needs, including merchant cash advances, term loans, invoice factoring, and business lines of credit.
- “4 Steps to Getting a Small Business Loan Without Collateral.” Richard Best. Investopedia. Updated August 26, 2020.
- “How To Get A Business Loan With No Collateral.” Veronica Ott. Loans Canada. Updated December 9, 2021.