What happens when your business is successful, but can’t back that up with a lot of company-owned equipment, real estate, or other physical assets? It doesn’t end the discussion. Business owners may qualify for unsecured small business loans or a business loan without collateral, though there is an alternative for many owners who choose to seek financing based on revenue and deposits through MCA financing. The lack of collateral does change the financing equation, but it doesn’t eliminate risk. The owner has to examine the comparison of the cost, guarantees, if any, the frequency of payments, and what happens to cash flow after the financing comes through.

What Is an Unsecured Business Loan?

A secured loan entitles the lender to a claim against certain collateral if the borrower defaults on the loan. An unsecured loan does not have a pledged asset backing the loan as strongly as a secured loan does, though lenders still may take a personal guarantee or maintain a general lien, among other things, depending on the loan product.

Secured loans differ in importance for businesses that have high-revenue streams without a significant cash outflow for equipment or real property. These businesses may have better access to capital by using unsecured small business loans, provided they meet requirements based on creditworthiness, cash flow, length of time in business, and ability to repay.

A business loan that is unsecured does not imply that it will be easier to qualify for. Because the loan is more unsecured, the lending process may utilize more business and/or personal credit scores to offset the lack of specific secured assets. Rates, loan amounts, guarantees, and terms will reflect the level of risk to the lender.

A borrower should review the security section of any contract and not just take the marketing statements of “no collateral” because they may find that, buried in the contract, there are personal obligations and liens.

Owners should distinguish collateral from guarantees. A lender may not require a specific truck, machine, or property to secure a loan but may require the owner to guarantee the loan. Some contracts may provide for a blanket security interest in business assets instead of a lien on a particular asset. Regardless of the use of the phrase ‘no collateral,’ these provisions may be just as important as other financing provisions. Therefore, in the event of a default by the business, the financing documents should be reviewed to determine what the lender can take.

Why Owners May Apply for an MCA Instead

A merchant cash advance may be a good option for some business owners who cannot use traditional forms of financing. For many cash advance programs, business sales and cash deposits over the last few months are some of the most important factors for the advance. This means young companies as well as companies with weak or no credit, and even companies that have been declined by banks for financing, may be eligible for a cash advance.

According to the FTC, merchant cash advances provide businesses with a cash advance in exchange for the business agreeing to repay a larger amount of money by having a certain amount of money automatically taken from their business account each day. While this system may provide businesses with cash rapidly, it does create cash flow problems over time.

The issue is that not requiring collateral does not eliminate financial risk. Instead of losing one asset, the business may have committed several assets to frequent collections. If cash flow is the difference between paying your employees, suppliers, and rent, that financial obligation should not be ignored.

MCAs can help support the business in the short term, but the owner should consider the trade-off between speed and the overall cost.

Unsecured Loans vs. MCA Financing

First, legally and structurally, term loans are secured by the borrower’s agreement to repay the debt in installments. MCAs, on the other hand, are more comparable to selling future receivables or revenue, as they are structured like a purchase of receivables or revenue rather than a traditional installment loan.

Second, pricing is different. Loans have an associated interest rate and true APR where available, fees, and payment terms with a scheduled payment. In contrast, MCAs have a factor or purchase price. A factor is different from APR, so the owner needs to calculate the total dollars paid and evaluate the cost on an annualized basis.

Third, timing of payments may vary as well. While many small business loans are structured with predictable monthly payments, MCA loans are generally collected on a daily or weekly basis. Monthly payments can give the business more time to accumulate revenue between obligations, but they do not necessarily make the financing cheaper. The total cost and how much the business has the ability to pay must be calculated as well.

Fourth, approval for unsecured small business loans is generally based on credit but may also consider the cash flow and the history of the business. On the other hand, some MCAs may allow a business with good bank deposits but lower credit to possibly get approved, but they charge a higher price and have more frequent payment obligations.

Credit and Revenue Still Matter Without Collateral

Although collateral is not required for underwriting, lenders still expect evidence that the business can repay the loan. Evidence can include the owner’s personal and business credit, business and personal bank statements, revenue, tax returns, and debt obligations. Lenders also consider the industry risk, length of time the business has been operational, and the reason the loan is being requested.

Getting an offer for bad-credit business loans doesn’t mean credit is irrelevant. Because of weaker credit, there can be fewer options, lower approval amounts, increased costs of the loan, and stronger business cash flow and guarantees can be required. Comparing different lending programs is critical because another lender can consider the same business differently.

Potential owners should check their personal credit reports to organize all business records and explain any unusual banking activity. They should make a record of all debt obligations and create a business forecast. While granting a loan is not guaranteed, these steps will help owners avoid accepting a loan that is not relevant to their business.

Do Not Replace Collateral Risk With Cash-Flow Risk

Business owners have a tendency to prioritize asset protection over the structure of the repayments in financing deals. This can be disastrous for a business. The cash flow of the operating account is negatively impacted by financing structures, putting pressure on the business even with no asset pledge.

The best way to illustrate the consequences of financing cash flow is to analyze the cash flow of a typical month and a below-average month. Will the business have enough cash to meet payroll? Will it have cash on hand to purchase inventory? Will it have the cash needed to fulfill payment obligations to its vendors and tax obligations? What happens if a major client delays paying its invoice by two weeks?

Money Man 4 Business helps owners analyze the financing options available for unsecured financing, term programs, SBA financing, working capital financing, lines of credit, and debt consolidation programs. Certain term programs can range from 1 to 25 years, subject to underwriting and availability. For companies burdened with multiple expensive obligations, Money Man 4 Business focuses on refinancing and consolidating debt and will pursue a qualifying program.

Money Man 4 Business says that eligible restructures often result in a 2/3 or greater savings for clients in combination with lower fees than on qualifying high-cost debt. Clients have the opportunity to work with a CFO with 34+ years of experience to analyze a financing offer in the complete context of their existing financing as opposed to in isolation.

The same reasoning applies to loan size. A business may potentially qualify for more unsecured financing than may be appropriate. Borrowing the maximum amount can increase the borrower’s monthly obligation. This ultimately limits the business’ flexibility during slow periods. The safer amount is the amount to fund a specific purpose for the business that can be justified by a specific business return and which can be reasonably expected to be repaid without the need for additional funding.

Frequently Asked Questions

Can a business get financing without pledging a specific asset?
Possibly. Some lenders offer unsecured products based on credit, revenue, business history, and repayment capacity. Other products may still require a personal guarantee or general lien.

Are Bad credit business loans the same as MCAs?
No. Bad-credit financing is a broad category. An MCA is one specific type of alternative financing and may be available to some lower-credit businesses because underwriting often focuses on revenue and deposits.

Should I Apply for MCA financing if I do not have collateral?
Not automatically. Compare the total cost, payment frequency, guarantees, liens, term, and cash-flow effect with other available financing options.

Protect the Business, Not Just the Assets

Funding helps a business keep functioning. There are several options available, including Bad credit business loans, a business loan without collateral, and unsecured small business loans. Assess after payroll, bill payments to suppliers, and business taxes and obligations.

Money Man 4 Business offers alternatives to traditional short-term funding, such as lines of credit, SBA financing, and working capital programs. These can also be used to consolidate credit. Often, the fastest unsecured funding option creates daily or weekly pressures that put a business at risk. A more sustainable funding option may protect more of the business than choosing the offer with no listed assets.