What happens if you require financing for your business but do not have collateral as security? Can you still get financing? Yes, it is possible.
Banks typically require some assurance if you cannot repay the loan. It usually takes the form of intangible or tangible assets that the bank may sell to receive its money back should you fail to repay the loan. The collateral can be a physical asset, such as a car, equipment, buildings, or other objects with a tangible value, for example, inventory, accounts receivable, intellectual property, or personal assets of the owner of the business.
According to Jennifer Clark, manager of the BDC Business Centre in Hamilton, Ontario, "a banker will have different risk tolerances and criteria for a loan that does not have tangible assets to offer as collateral." A quality business idea with market traction and a lot of potential, excellent management, and demonstrated cash flow are helpful for a company.
Here are some business loans you could be eligible for without collateral, assuming your company is financially stable.
Working capital loans
Working capital or cash flow loans are typically designed to assist businesses in paying for short-term expenses like an anticipated cash flow shortage or as an investment to grow. Examples include:
- An improvement to a leasehold
- An overhaul of a website
- A product enhancement
- Marketing costs to boost revenues
- Recruiting new salespeople
- Business acquisitions
Banks usually require collateral for the loan due to accounts receivable, inventory, or the owner's assets. However, some institutions do not require collateral when lending a lower amount.
According to Clark, bankers consider the company's cash flow and how much they can borrow based on EBITDA and anticipated cash flow if there is no security for the loan. Along with the owner's management of the business, the sector, and if the project makes sense, they also consider the owner's credit score and net worth.
Being able to score well on these factors will allow a company to get more favorable loan terms.
Without tangible collateral, in most cases, you'll have to provide a personal guarantee for an operating capital loan. Additionally, security might also be needed based on your financial circumstances.
Market expansion loans
A Market expansion loan is akin to a work capital loan. Businesses with a track record of financial stability and cash flow can typically get one with no collateral. It is an excellent option for companies that require capital to expand. It could boost your reach, launch a brand-new product, or establish an office in a new area.
The terms are typically created to address the specific growing requirements of businesses. They could provide flexible repayment options to safeguard the working capital of your company, for example, structuring the payment to increase or decrease following the flow of cash as well as the possibility of paying off the loan with no penalties and an easy procedure for re-reading the loan (a method to borrow funds you've paid to repay your loan).
Technology Finance
Technologies loans are comparable to working capital loans with terms specifically tailored to companies that require funds to invest in hardware, software, IT planning, and technology companies looking to grow their capital.
These loans typically offer an adjustable repayment plan suitable for companies or investments in technology. Based on your company's financial condition, the type of loan is available without the entrepreneur needing to offer security.
Friends, family, and angel investors
Friends, family members, and angel investors might be willing to loan you money without collateral, but they could require a stake in the company.
Angel investors are usually wealthy individuals who invest by themselves and through groups of angel investors in promising start-ups to help finance the early stages of the business. They typically seek an ownership stake to sell for profits as the company expands. They might also desire to consult with the company to share their experience and network.
Personal loan
Specific private funding sources do not require collateral, like personal lines of credit or credit cards. However, the high-interest rate due to credit card debt may render such loans unaffordable if the balance has yet to be paid monthly.