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If you require a small business loan but your company doesn’t have any assets (whether property, land, stock or share options), you may need to give a personal guarantee, which can put your personal assets (including your home) on the line.
It’s not an attractive proposition, to say the least. That’s not to say that secured loans are in general a bad idea: being less risky for the lender, they tend to attract very competitive interest rates.
However, you need to balance this saving with your increased risk, particularly if it’s personal rather than business collateral that is being used. So what are the alternatives?
Merchant cash advance
This form of finance allows you to borrow an agreed sum and repay it via a fixed percentage of your credit card sales.
The advantage is that repayments are geared to turnover, meaning you won’t be hit with a repayment that you can’t meet. On the other hand, this is traditionally a very expensive way to borrow.
By involving business angels, you can trade cash for equity, and potentially get an influential new business partner.
However, attractive as this may seem, it means diluting your equity stake in the longer term, and could prove hugely expensive if the business becomes a runaway success.
This fast-growing method of finance enables you to bring public and private investors together to fund your business.
To succeed, you will need a strong brand or a particularly visible product, ideally in the high technology sector.
Alternative lending platforms allow individuals to lend to businesses based on their business plan. The loan term and interest rate will usually be dictated by the company’s creditworthiness.
Four ways to borrow without collateral
If you prefer to avoid the above methods and take out a traditional loan from a bank or alternative lender, there are ways to improve your chances, and without offering a personal guarantee.
- Take out an unsecured loan
This is stating the entirely obvious, but it’s possible that your business will qualify for an unsecured loan, making the issue of collateral irrelevant. The ability to show consistent profits, demonstrate an excellent credit history or present a persuasive business plan will significantly increase your chances.
- Research the market carefully
If at first unsecured business loans appear to be thin on the ground, look again: they are out there. You’ll almost certainly be looking at much shorter terms and much higher interest rates, but the additional peace of mind could well be worth it.
- Improve your credit score
This is really the key to everything. The less collateral you have, the more important your credit score becomes. If yours is compromised, try to pay off as much debt as you can, reduce your credit card balances (whilst keeping the accounts open) and strive to pay your suppliers back on time.
- Draft a great business plan
Even if your company’s progress to date is relatively unexciting, you can tip the balance with a thrilling business plan.
This should clearly set out your aims and objectives, emphasize your unique market position, and most importantly, set out a clear and costed plan for growth.