There are two types of loans: secured and unsecured.
Secured loans have collateral that guarantees them. For example, a car loan is secured because if you default on the loan, the car can be taken back in lieu of payments.
Many business loans require the security of collateral, but there are others that don’t.
“There are unsecured loans available [for businesses], however those are typically the hardest to qualify for and have higher rates,” says Susan C. Bogardus, first vice president and commercial lender at First American Bank and Trust, a community bank based in Athens, Ga. “The guidelines are more stringent due to the lack of collateral.”
Let’s take a look at the where you might find a business loan if you don’t have collateral.
Get an SBA loan
Business loans backed by the Small Business Administration (SBA) don’t typically require collateral. Even new startups are able get backed by the SBA without collateral. The guarantee from the SBA, which will repay up to 85% of the loan if the borrower defaults (75% if the loan is more than $150,000), acts as collateral. It’s the guarantee to the bank that they are not taking a big risk all by themselves.
To qualify for an SBA loan, you must have a strong credit and borrowing history and a solid business plan. It’s not a simple process, but according to the SBA, 95% of all small businesses are eligible for an SBA loan.
Seek local government help
Maybe the SBA doesn’t work out for you. That doesn’t mean all is lost in terms of help from the government.
“I often suggest that business owners explore options with their local government agencies,” Bogardus says. “There are sometimes loans or grants available for new businesses that locate within certain districts [such as a downtown revitalization area] or for certain types of businesses. These are at very low rates or might even be grants with no repayment required.”
Visit a private lender
Maybe you don’t have collateral associated with your business, but you do have a way to offer a private lender or financial institution a personal guarantee. You might use a cosigner — such as a relative with a healthy bank account and credit history.
Or perhaps you have real estate or some other valuable commodity a lender will consider as a personal guarantee.
It’s become more common in recent years to see people setting up sites to fund their own businesses through such companies as Indiegogo or GoFundMe. These are basically platforms in which individuals can raise funds through social networks. The donors can give as little or as much as they desire, and the business typically offers some type of share, bonus or reward in return for the donation.
Start a franchise
When you open a business that is already franchised, such as Subway Sandwiches or Pizza Hut, you benefit from a recognizable brand that has already drawn in sales, a solid business model and support from the franchise itself. Banks typically like financing franchises over brand new businesses because they are more of a known entity with a proven track record.
Ask your rich relative for a loan
“There is also the friend and family avenue for financing your business,” Bogardus says. “That all depends on the relationship that you might have with the people in your life. Mixing friends and business does not always work. If you choose to go this route, I would make it legal with a note being signed between the parties, just like with a bank, so that everyone is clear on the repayment terms.”
It’s true: borrowing money from friends or relatives can come with its own set of problems. On the other hand, the route has many benefits. You can typically work out a deal that is much more advantageous than any a bank will offer, and if your business does well, the family member or friend can share in your rewards.
Of course the opposite is true if the business fails. Your friendly donor will then go down with you, and that might not be pretty.
Create a mix of some or all of these options
As an example, a friend who had a greenhouse business in Wisconsin growing basil year-round was given a land deal by the local government, which wanted to help small businesses thrive. He received an SBA-backed loan for the major purchases, and also asked for smaller amounts of help from friends and family. Personal credit cards were put to use when necessary.
In the end, however, the business failed due to a lack of initial capital, despite the fairly wide distribution of its excellent basil to restaurants and local grocery stores. Although the company appeared to be successful, there just wasn’t enough money to keep up with the growth necessary to create sufficient profit.
But this is a topic for another article.
First, get your business funded, then play it smart and thrive. For a list of places to seek business loans, check out SuperMoney.com.