When it comes to business lending, there are many different options for small businesses who need some initial investment to get off the ground, or a cash injection later to boost their growth. This article will look at if small businesses are able to secure a loan without putting up what lenders call ‘collateral’ with it. We’ll look at the following areas:
- What is loan collateral?
- What types of loans are available to small businesses?
- What are the options for small business loans without collateral?
What is loan collateral?
Collateral is items of value or business assets that business owners offer up to secure a loan. By using valuables as collateral, it reduces the risk of lending money to a small business to the lender, because, in the event that the business cannot make the loan payments the lender can use the collateral to repay the debt. In this situation, the collateral will be seized and resold to cover the remaining value of the loan.
Valuable items and assets that can be used as collateral vary from:
- Stock or inventory
- Insurance policies
- Bonds or stock investments
- Other valuables such as antiques, jewellery, precious metals or art
What types of loans are available to small businesses?
There are many types of lending available to small business owners. Before applying you should have an understanding of why you need the money and be able to make an informed decision on the best type of lending for your needs.
The most common type of loan people would think of, is where you borrow a set amount of money and it is paid back over a set time period, through monthly instalments. These can be secured or unsecured:
- Secured: the loan is backed up by a valuable business asset as ‘security’ — your collateral — potentially your premises or a business vehicle. If you fail to repay the loan, the lender can then use the collateral as repayment.
- Unsecured: this type of loan requires no collateral. Some lenders may ask you to sign a guarantee where you will be personally liable for the debt or use a guarantor who will take on the debt if you can’t.
If you have been trading for less than two years then you can apply for a start-up loan through HMRC for up to £25,000.
However, this differs from a business loan, as it is an unsecured personal loan. This means you will be personally liable for the debt and it will affect your personal credit score. You also won’t use collateral to be your security in the event you can’t repay the loan. You’ll pay back the loan over 1-5 years and it has a fixed 6% interest rate. You can find out more on HMRC.
Merchant cash advance
This is a flexible type of finance lending, based on how much you make through customer sales. The lender gives you the agreed amount of cash upfront and you repay it via a percentage of your overall card sales.
Revolving credit facilities
This is very similar to how an overdraft would work on a personal bank account, as it is a flexible cash facility that allows you to dip in when needed, and you only pay the interest when funds are used, and likely won’t need collateral to borrow.
Invoice financing can be used to ease cash flow issues if this is why you’re looking at a loan to tide you over. If a client has not paid an invoice on time or you need the money quicker than they can provide it, an invoice finance lender will give you the total of the invoice and you pay it back with interest.
Business credit card
Business credit cards give you the flexibility to access cash as and when you need it. They have the added benefit of building up a good business credit score when used properly, and you likely won’t need collateral to get one.
What are the options for small business loans without collateral?
There are many options for lending for small businesses that don’t have big assets that they can secure loans against. In this case, there are still many options out there. Many online lenders will offer unsecured loans, and as mentioned above, there are several options available in the UK to businesses that need different types of lending. If a term loan is your only option, and you’re finding it hard to find a lender who won’t offer an unsecured loan there still may be ways for you to borrow money without putting up collateral.
However, in order to get the loan without collateral as a backup, you’ll be required to prove that you have positive cash flow and are making a profit so that the lender can see your business is less of a risk and you will be able to pay back your loan properly.
To secure funding without valuable assets or collateral you will likely need to provide the following reports to prove your income and show where your repayments will come from:
- A balance sheet
- Income and loss accounts
- Cash flow records and projections
- Profit and margin reports
Save time on financial management
It’s easy to manage all your financial data in one place with the Countingup business current account. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes.
You can view real-time insights into your business’ finances, profit and loss statements and tax estimates, and you’ll be able to reference your important financial figures quickly should you need to prove your money management to a lender.
All the features can save you hours of financial admin, and make managing your business easier. You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple and straightforward!
Download the Countingup app to apply for your business current account in minutes. All you need is proof of ID and a selfie. Download the app here.