Commercial loans are a handy tool for those who want to raise finance for their business to achieve their goals, whether it be improving cash flow, funding growth or overcoming some other financial hurdle.
Through these loans, it’s possible to obtain larger sums of funding. However, this will typically apply to a specific type of business: those deemed low-risk and with substantial security to offer lenders.
If you do not have the collateral to offer against a loan, you might find it harder to raise significant amounts of money from a lender. In some cases, you may even struggle to get accepted at all.
This doesn’t mean you won’t ever be able to get a loan. You just need to identify alternative options in the market that better suit your eligibility – including solutions that do not require security. This guide explains the best routes to take to get the loan you want without collateral.
- What are the implications of not having collateral?
- Unsecured loans
- Alternative lenders
- Personal guarantees
- Other types of finance
What are the implications of not having collateral?
When you apply for a loan, the lender wants to be confident that you will pay them back in full and on time. Many lenders will therefore ask for collateral that can be called upon and taken as repayment in the event of default.
This ‘collateral’ will typically refer to your business assets, such as company vehicles, machinery, property and other valuable equipment. While it will only be seized as a last resort, having it available offers peace of mind to the lender that they can recoup their funds if needs be. This will be particularly favourable for businesses already deemed high-risk (such as due to a low credit score), giving them an option to leverage funding.
If you don’t have the assets to use as collateral, you may find that risk-averse lenders do not wish to accept you for funding or will give you lower amounts. This is due to the lack of security given to the lender. However, there are alternative options for these situations, which we explore further below.
Unsecured loans
While some lenders will require security in exchange for their funding, some offer unsecured loans. These loans do not require collateral, so they can be worthy options for those who do not have assets to leverage.
There are some factors to be aware of when choosing an unsecured loan. Firstly, due to the lack of security, these lenders will tend to offer lower amounts. Secondly, the interest rates will typically be higher to offset the added risk.
This doesn’t mean an unsecured loan isn’t worthwhile, as it can still provide valuable funding for businesses without collateral, but make sure you can afford the repayments with the increased interest. If you are looking for higher levels of finance, you should also be prepared to pursue other routes to top up your funding levels.
While unsecured loans won’t ask for security in the form of assets, many will ask for a personal guarantee instead, so you need to understand the implications of this.
Personal guarantees
A personal guarantee is when a person (such as a business owner or director) agrees to pay the loan balance if the business were to default. Where there are insufficient assets to cover the outstanding borrowing, lenders will be able to call upon the guarantee if required.
Personal guarantees can be helpful to grant businesses access to loans where they may otherwise be rejected. However, it shouldn’t be entered into lightly.
Firstly, you need to find someone willing to be a guarantor, this will be most likely be the owner directors of the business. While it is unlikely that the guarantor will be called upon, there is the risk that whoever fulfils the role may have their personal assets called upon, and they must be prepared accordingly.
Due to the risk, it’s also wise to purchase personal guarantee insurance. With it, you can obtain protection for a proportion of the amount owed, so the debt does not fall solely on the guarantor, which might make it a more welcoming prospect and a safer option for businesses.
Alternative lenders
Another option for businesses seeking a loan is to review alternative lenders. Alt finance is on the rise in the UK, and part of this is because they can offer agile solutions that give more companies access to funding – including those with limited collateral.
Shop around alternative lenders on the market, or consider speaking with a financial advisor who can put you in touch with suitable sources. While the loans you find may still be unsecured or require a personal guarantee, you might be able to find options that are more flexible or competitive, including lower interest rates or delivering higher amounts of funding.
This will enable you to find a financial product that still suits your needs and provides you with a reasonable deal.
Other types of finance
If you are still struggling to find a commercial loan that works for you, it may be time to consider the other options on the market, depending on your objectives.
Some solutions include invoice finance and stock finance. In these instances, your owed invoices or warehouse stock act as the collateral rather than the business assets as a whole, so you can still obtain finance.
Another option might be equity finance, such as through angel investment or venture capital. You offer shares in your business in exchange for their investment. However, you do need to have a strong business or concept with growth potential with the appropriate return on investment they require. If you are successful, you may be able to raise large amounts of money for the long-term running of your company, even if you do not currently have sufficient assets.
Conclusion
If you have limited assets to utilise as collateral, you may experience frustration when trying to secure a commercial loan, especially if you have previously been rejected. However, it is still possible to get the funds you need to move forward by identifying alternative loans that better fit your criteria.
By understanding the role of unsecured loans, personal guarantees and alternative solutions and how they can help you access finance, you will be more likely to find a solution that works for you and be accepted by a lender.
If you are struggling to access finance for your business due to a lack of collateral, we can take you through the alternative options, including loans that may work for you and other funding sources.