Many small business owners might be under the impression that they can’t get a business loan without collateral, because they believe banks will consider them too high-risk, or unable to pay the loan back.
This is not strictly true – banks are more willing to provide loans to small businesses than they have historically been. Occasionally, these loans will be unsecured, but this type of bank loan is only offered to small businesses with the best credit history.
For a relatively small new business, aiming to secure a small business loan with no assets can seem impossible. However, there are alternative finance routes available for small businesses aiming for rapid growth.
In this article, we’ll discuss where to get a business loan without collateral, and the various steps small businesses and start-ups should take before applying for finance.
What is a small business loan?
A small business loan is a source of finance intended for less-established businesses who are looking to scale their operations. Most small business loans are available in amounts from £500 - £5,000,000.
Learn how small business loans work in our complete guide, or check our FAQs, if you have further questions.
Small businesses at the beginning of their journey often struggle or fail due to a lack of available finance. This is one of the top three most common reasons businesses collapse in their first five years of operation.
As a new business it can be hard to secure finance. You might not have a great credit history, you may have no clients signed up or, quite often, will simply have no track record of success.
If this sounds familiar, you’ll be intrigued to learn what types of small business loans are accessible to your business.
Business loans without collateral - how to get a start up business loan without collateral
There are various types of small business loans that your business can apply for:
Asset financing loans
Asset financing is a form of finance for companies looking to purchase new equipment to drive growth, when they lack the capital to make purchases from their business accounts.
Asset financing loans can help businesses buy computers and office equipment, for example, to help a growing team work more efficiently; allow a food manufacturing business to purchase an essential piece of machinery, or enable a pub to restock its supply of alcohol.
Asset financing loan terms typically range between 12 and 72 months.
This type of loan means businesses don’t have to wait for their invoices to be paid by clients before investing or spending the money owed to them, for use in growth projects.
Invoice financing involves a business selling its balance sheet to a lender for an agreed percentage of its value.
If your business growth is plagued by continued late invoice payment, invoice financing could be an appropriate form of finance.
A credit line is a financing resource for small business, where a business and lender agree on a fixed amount of credit available to the business to use whenever they require it.
This can be useful to businesses who are facing unexpected costs. The credit is ready and waiting. Think of an arranged line of credit as a form of loan in reserve, available when it’s most needed.
If your business can’t get a small business loan from a bank, it might be time to turn to alternative lenders, who are often much more willing to provide unsecured finance to new businesses.
There are, however, some caveats to be aware of.
Alternative lenders, such as online-only banks and peer-to-peer lending programmes will most likely require some form of personal guarantee. A company director is required to give this personal guarantee themselves.
As well as personal guarantees, which mean you and not your business is liable to pay back the loan, alternative finance small business loans can come with higher risks because borrowers will often have to pay much higher interest rates for an unsecured loan.
Alternative financiers will look to your businesses credit record, business plan and revenue generating history to determine the level of risk your loan will present for them.
What to consider when applying for alternative finance?
Take the following steps before applying for a small business loan:
1. Credit record
By taking steps to optimise your credit rating, you present your business as a lower potential risk to lenders. With credit ratings given a lot of weight when applying for a small business loan, your business must improve its credit rating if it is currently low.
There are various methods for a small business to improve its credit rating.
Share as much information as possible, as credit checking relies on confirming information about your businesses’ incomings and outgoings.
Pay your bills on time – failure to pay promptly can damage your credit rating, as paying late without added interest is a form of credit issued by your creditors.
Filing your accounts on time is a good indicator that your business is in sound financial health, with a firm grasp on its responsibilities.
Limit credit applications so that you make them only when necessary, as credit applications trigger credit searches on your business. These are recorded on your credit record, and too many credit searches are a warning sign to lenders that your business might be struggling financially.
Check the Experian credit score guide for more details.
2. Ensure you can pay back the loan
Consider your cash flow projections- this knowledge will come from having a detailed business plan. By assessing the cash flow you can expect to run through your business in the future, you will be able to determine the level of monthly repayment you’ll be able to afford, and the level of interest rates which won’t cripple your business.
Be aware that interest rates for alternative finance business loans are often much higher than traditional small business bank loans. Remember, a failure to repay any business loan will damage your credit score and your ability to secure funding in the future.
3. Tighten up your business plan
You’ll want to ensure your business plan is watertight. Make sure to include detailed financial statements of current and projected future earnings. Outline how your business operates and how it earns money and finally, present your growth plans, to show how you intend to afford the loan repayments in the future.
4. Ensure your business is eligible
During a business loan application, you may have to declare your company turnover. The qualifying amount differs between lenders, but some will require turnover as low as £12,000, while others will expect to see £100,000 - £200,000 levels of turnover, before accepting a business for a loan.
5. Compare small business loans lenders
Compare small business loans with our comprehensive guide from a range of providers, including traditional banks and alternative lenders.
Our table explains the features of each loan, so you can compare loan terms – such as eligibility criteria, whether there’s a minimum turnover required, and the available loan amounts- and learn more about each lender before seeing the deal provided on their website.