3 Business Loan Options That Don’t Require Collateral

Taking out a business loan can feel like a risk, especially if you are worried about putting your own assets on the line. Or maybe you don’t have the right assets to pledge to back a business loan. But plenty of funding options don’t require you to use assets like your home, savings or other valuables as collateral to get the funding you need for your business. 

We’ll cover three smart borrowing options that generally don’t require collateral. 

Business lines of credit 

A business line of credit works kind of like a credit card for your business. Instead of a lump sum, the lender approves you for a set limit, generally from $1K to $250K. You can borrow as needed, and your limit replenishes as you pay it back. You only pay interest on what you borrow, but watch out for extra fees like maintenance or draw fees. 

Terms are usually short, from six to 18 months, and costs vary by lender and your creditworthiness. This type of loan is a great option if you have ongoing or unpredictable expenses, like covering payroll or seasonal slumps. Plus, plenty of unsecured lines of credit won’t require you to put your assets on the line for approval. 

Unsecured business term loan 

Short-term business term loans offer a fixed lump sum of cash, generally up to $500K or more. You’ll pay back the loan over a set period, typically one to three years, with predictable monthly payments. This type of loan is best when you have a specific project in mind and know how much money you need to borrow. 

With an unsecured loan, you won’t have to put up any collateral. However, this lack of collateral means the lender is taking on more risk, which may mean higher interest rates than a secured loan. But if you have good enough credit and strong business revenue, you may still qualify for competitive rates and terms. And, even if your lender doesn’t require collateral, make sure that it doesn’t require a personal guarantee, either. 

SBA 7(a) loans

These government-backed loans help you access funding with a little extra safety net. The SBA guarantees part of your loan, meaning if your business defaults, the government covers a portion, lowering the risk for lenders.

You can borrow up to $5 million, but for loans under $50K, collateral requirements are often more flexible and in some cases, not required at all. However, most SBA loans still require a personal guarantee, meaning your personal assets could still be at risk if you can’t repay. 

Repayment terms can range anywhere from five to 25 years, and interest rates are usually competitive. But these loans are harder to qualify for than traditional loans, and the process is typically longer. And, even though you can get away with no collateral requirements for smaller loan sizes, ask your lender about personal guarantee requirements, down payments and guarantee fees. 

Collateral vs. a personal guarantee 

Collateral and personal guarantees work similarly for a lender. They both offer a way for the lender to lower their risk if you can’t repay the loan. 

Collateral is when you pledge a specific asset to back the loan, such as a car or home. Personal guarantees are basically a promise that you’ll repay your loan from your personal assets if your business cannot. 

However, there are still business loans that don’t require a personal guarantee or collateral.

Other tips to limit your liability 

When taking on any type of business debt, it pays to be cautious. Here are some tips to protect yourself. 

• Form an LLC. You’ll want to separate your personal assets from your business legally. This separation limits your personal liability if you can’t repay the loan. 
• Ask about limited personal guarantees. If you do have to put a personal guarantee on the line, a limited personal guarantee allows you to cap the amount you’re personally responsible for. 
• Only borrow what you need. Even if you’re offered more than you need, it’s best to borrow only the minimum needed to accomplish your goal. This limitation reduces your financial risk and personal exposure. 
• Shop around. Compare multiple lenders to be sure you’re getting the best rates and terms. Consider starting with a marketplace to compare multiple options with one application. 

Wrap Up 

You don’t have to put everything you own on the line to secure financing for your business. Options like business lines of credit, unsecured term loans or lower amount SBA loans could offer access to funding while keeping your personal assets safe. Just be sure you read the fine print, check for extra business lending fees and understand what you’re agreeing to before signing your loan agreement.