For small- and medium-sized businesses (SMBs), securing a business loan with no personal guarantee may seem a fanciful notion right now.
Even in the best of times, most lenders insist on some kind of guarantee or collateral to safeguard the loan. The current economic climate has made this much tougher still, with traditional lenders turning down most SMB loan applications for a variety of reasons.
Restricted access to capital can stifle small business growth, leaving owners and employees feeling like they’re in a state of limbo.When SMBs can’t get the funding they need, owners often find that they:
Recent analysis by CB Insights found that a lack of new capital was the most common reason why startups fail, ahead of factors like poor market demand and tough competitors.
Yet, it’s not all bad news.
If you’re an SMB owner, you may not realize that there are numerous viable lending options out there, including financing that doesn’t require a personal guarantee or collateral to get started.
While these often come with built-in safeguards such as higher interest rates, they can be the financial launchpad that small businesses like yours are looking for.
Are you a small business owner looking to secure funding without providing a personal guarantee or collateral? When it comes to small business loans, Duckfund takes the time to find out what you and your business are really about, eliminating the need for collateral and personal guarantees. Sign up with Duckfund and apply for a small business loan in less than 60 seconds.
Before we get started, it’s important to clarify exactly what a business loan with no personal guarantee entails, and how a guarantee differs from collateral.
First of all, a loan with collateral, also known as a secured loan, is financing that requires business assets as security, whether it be real estate, vehicles, or equipment.
Unsecured loans, conversely, are simply funding options without these safeguards.
A personal guarantee, meanwhile, is legal recognition that you are personally liable for repaying the loan, and it can go alongside business collateral or without it.
When collateral is not on the table, the lender can claim your personal assets to recover the debt. Unlimited guarantees cover the whole loan amount, while limited guarantees are restricted to just a portion of it, and are common in the case of multiple borrowers.
To sum up, no-guarantee business loans are financial mechanisms without business collateral or personal guarantees.
While it’s more difficult to find these than secured finance, it’s not impossible. The next section will explore these possibilities.
Finding unsecured finance is a bit like shopping for a new dress or suit for a wedding; it’s only daunting if you don’t know where to look.
A new wave of digital-first alternative lending options, along with products from traditional institutions trying to compete, means that finding loans without a guarantee is not just possible, but an increasingly common funding opportunity for SMBs.
Banks may be responsible for a high loan rejection rate, but there are still some lending options out there that don’t require a guarantee, particularly from digital banks.
Fintech firms caught traditional banks napping in 2017 when they became responsible for $41 billion of loans, and they have since continued to be a growing source of small business lending.
This caused more established banks to up their game, and there are now several funding options on the table for small businesses to choose from, both from fintech and traditional institutions.
A term loan is a lump sum that’s repaid over a set period of time, most commonly four or five years, according to the annual percentage rate (APR). This is where fintech lenders have gotten a leg up over their rivals, offering more flexible lending criteria than their traditional peers, who had tightened their restrictions following the 2008 financial crash.
Unsecured term loans – that is, loans without a personal guarantee – may come with higher added costs, but these are normally tax-deductible and are worth absorbing if the funds get the business out of a tough situation.
Acting as a kind of business overdraft, a line of credit provides you with quick access to credit as long as you don’t exceed the limit and meet the agreed terms and conditions, such as making minimum monthly payments.
While this may sound very similar to a credit card, it has two notable differences.
First, LOCs often have higher limits than cards and a lower APR, making them suitable for large business purchases.
Second, the lender takes into account other factors about the business that they might not with a credit card, such as a business plan and its potential profitability.
As well as fintech banks, the current digital finance revolution has opened the doors to a wide range of non-bank lenders that are willing to lend to small businesses.
These companies are often free of the red tape commonly associated with banks, offering quicker, simpler applications; more variety; and often fewer limitations on what you use the money for.
As well as standard term loans that take on a similar guise to those offered by traditional banks, alternative lenders can offer the following funding options.
Also known as a merchant cash advance (MCA), this type of financing provides you with a cash sum up front that you repay with a percentage of your future sales, plus a fixed fee.
MCAs assess future revenue levels instead of your credit score, so they’re useful if your projected sales are looking healthy. Maybe you have a large order coming in but you need a quick cash fix to keep things running smoothly, in which case an MCA is a quick, convenient way of doing that.
However, the downside is lenders often insist on buying the sales at a discount, and may throw in extra fees if they sense you’re desperate. It may also be difficult to break the debt cycle if you don’t have subsequent sales orders lined up.
Working on a similar premise to MCAs, invoice financing effectively means a company is buying unpaid invoices from you, then getting their money back when your customer settles up.
This too involves a possible fee and discount in favor of the lender.
Taking the concept of alternative business lending a step further, Peer-to Peer (P2P) lending works on the premise of bringing individual lenders and borrowers together through digital mediums.
P2P platforms are the most common conduits for these arrangements, allowing business owners to search for specific loan products and, in some cases, providing extra security for both parties in the form of legal agreements and contingency funds.
The sheer scope of P2P lending options now available online means it’s likely you’ll find some attractive options. Interest rates are often lower than at banks, albeit with arrangement fees built in, while they tend to avoid the early repayment fees that banks are notorious for.
Poor credit scores are less of a factor, too.
P2P platforms often generate their own score based on extra data points, such as business plans, job history and even education. They then use this information to match you with the most suitable lenders often via AI-based assessment tools that make the process quicker and more accurate.
The growing popularity of P2P lending platforms comes with one important issue, however: they attract investment from mainstream institutions. Institutional P2P lending has also taken off, contradicting the principle of ´peer-to-peer’ finance.
While this serves a similar purpose — many small businesses still find finance they wouldn’t have had pre-internet — this does mean many loan approvals are in the hands of institutions rather than individuals. True P2P lenders may become harder to find.
Frustrated at the lack of unsecured loan options for your business? When it comes to funding, Duckfund takes the time to find out what you and your business are really about, so that collateral and personal guarantees become irrelevant. Sign up with Duckfund today and apply for a loan in less than 60 seconds.
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