What if you need a loan for your business but don’t have anything to offer as collateral? Can you still get financing? The answer is usually yes.
Banks usually require some form of security in case you cannot repay your loan. This usually takes the form of tangible or intangible assets that they can sell to get their money back if you stop repaying your loan. Collateral can be a physical asset – vehicle, equipment, building – or other property of tangible value such as accounts receivable, inventory, intellectual property or personal assets of the business owner.
“Banks don’t have the same risk tolerance and criteria for a loan without tangible assets to take as collateral,” says Jennifer Clark, director of BDC’s business center in Hamilton, Ontario. “Usually when a company has a good cash history, strong management and an innovative idea with high potential that is attracting market interest, that is an asset.”
Here are various business loans you could get without having to post collateral, provided your business is in a strong financial position.
How to get a business loan
1. Working capital loans
In general, working capital loans or cash loans are designed to help businesses pay short-term expenses, such as when they anticipate a cash shortfall or an investment to support their growth. Here are some examples:
Banks often require collateral for these types of loans, usually in the form of accounts receivable, inventory, or the business owner’s personal assets. However, some institutions do not require it if the loan amount is lower.
and/or its cash flow forecasts, continues Jennifer Clark . They also dwell on the company’s management team, the sector of activity, the relevance of the project as well as the net worth and the personal credit score of the owner.
If it performs well in these respects, a company can get better loan terms.
In general, without tangible guarantees, it is necessary to sign a personal guarantee to obtain a working capital loan. Moreover, depending on the analysis of your financial situation, it remains possible that a guarantee must also be requested.
1. Loans for market expansion
Companies with a good cash flow history and good financial standing can often get it without providing collateral. It is designed for businesses that need capital to grow. Projects may include expanding the market, launching a new product, or opening a new location.
If the company has nothing to offer as collateral for the loan, banks look at its liquidity and how much it can afford to borrow based on its EBITDA and/or cash flow forecast.
Its terms are usually designed to meet the specific needs of growing businesses. They can provide flexible repayment to protect the business’ working capital, such as structured payments that can fluctuate up or down based on cash flow, penalty-free loan repayment, and a simplified process for obtaining a new advance on the loan (a way of re-borrowing the principal already repaid).
2. Technology Funding
Technology loans are similar to working capital loans, but have terms specifically tailored to companies that need capital to invest in hardware, software or IT planning, or technology companies looking for growth capital.
Such loans usually offer flexible repayment terms that suit technology investments or businesses. Depending on the financial situation of your business, this type of loan can be granted without the business owner needing to provide a guarantee.
3. Family members, friends or financial angels
Relatives, girlfriends and financial angels may be willing to lend you money without requiring collateral, but they may want a share of your business in return.
Angel investors are usually high net worth individuals who make early-stage investments, either on their own or through angel investor groups, in high-potential start-up companies. They often seek to obtain stakes in the company which they can resell to make a considerable profit as the company grows. They also sometimes want to provide advice to the business owner, in order to pass on their knowledge and allow him or her to benefit from their contacts.
Some personal sources of financing do not require collateral, including a personal line of credit and credit cards. However, the high interest rate associated with credit cards can make this type of financing prohibitive if the balance is not paid each month.