A loan may be the thing you need to start a small business or to take your existing business to the next level. An unsecured or uncollateralized small business loan may be the solution you are seeking.
Don't Loans Require Collateral?
Many loans require collateral or security. Collateral is when you place a piece of property or an account to guarantee the loan. If you default on the loan, the lender can seize that property to recoup its losses on the loan. Some people put up their home, buildings, or inventory. If you don't have collateral—or don't want to place something of value at risk—you may wonder how to get a small business loan without collateral. There are a number of alternatives.
While most small business loans through the Small Business Administration (SBA) require collateral, it is possible to get a loan without collateral if you give a personal guarantee. The drawback of a personal guarantee is that if the business fails, you are personally on the hook for the loan amount.
Many alternative lenders (such as online lenders) will provide a loan if you can show positive cash flow and make a personal guarantee. You will also be expected to show a formal business plan.
Peer to Peer Loans
Peer to peer lending is a great way to get financing for your small business. P2P lending is done via loans that are generally made by individuals through online platforms. You can expect a peer to peer to loan to require higher interest rates and shorter terms and to base its determination on your personal credit history.
Unlike peer to peer financing, equity financing occurs when you give someone or some company an equity position in your company in exchange for funds. Angel investors are one type of equity financing. It's not a loan, since you are essentially selling part of your ownership position, but it can be a way to raise funds.
Crowdfunding is becoming a very popular way to fund your business. Many people come together through a crowdfunding site, putting small amounts of money together to invest in a business. You can raise as much as $1 million per year this way under current laws.
To be successful, you should offer more than just a cool product. The most successful campaigns offer extras like consulting sessions, behind-the-scenes tours, limited edition products, gift bags, or personal calls or emails.
Keep in mind that the crowdfunding site takes a fee or a percentage of the money raised. There also is no guarantee that you will raise the money you need: Fewer than 41% of Kickstarter campaigns get funded.
Some lending companies will provide your business with a loan in exchange for a percentage of your receivables. These loans are often called cash advances, not loans. As with all uncollateralized loans, the interest rates can be high.
It is possible to fund your business without putting up collateral, but you need to be selective about the type of loan you choose and make sure you understand the terms.
LegalZoom can help you start a business easily and affordably. The process begins by answering a few questions. We'll assemble your documents and file them with the Secretary of State and you'll receive your completed business formation package by mail.