If you are looking for a huge loan amount, collateral-free loans may not be of much help. With collateral-free loans, also called unsecured loans, the loan amount is less but the interest rate would be high. Collateral-free loans serve best as short-term loans that you intend to repay at the earliest.
What is a Collateral?
Collateral is simply an asset, such as a car, landed property, or even business equipment that a borrower offers up as a way to qualify for a particular loan. Collaterals make lenders more comfortable offering the loan as it protects their financial stake in the event of the borrower defaulting in repaying the loan. It also keeps the borrower on their toes, ensuring some form of financial responsibility.
Accessing Loans Without Collateral
Despite being an important factor in carrying out a financial transaction rooted in trust and unforeseen events, there are loans that can be acquired without needing collateral. And we are not talking about regular soft loans from loan apps.
Examples of such loans can be found below:
1. SME Loans
As with emerging economies the world over, a lot is hinged on Small and Medium Scale Enterprises. While SMEs may not make the kind of numbers big businesses do individually, as a collective they can pool enough resources to keep the engine running. In light of that, most governments have put up programs to ensure that small-scale businesses can access collateral-free loans.
A good example of such loans is Smart Business Loan being offered by Standard Chartered Bank in Nigeria. With the Smart Business Loan, borrowers can access loans of up to ₦ 20 million for business expansion without collateral. It also offers repayment options of up to two years for both existing and new clients.
Another example is Union Bank’s Cash Flow Lending which provides working capital to help businesses meet their short-term needs. The loan that can be accessed without collateral, comes with an affordable interest rate and a maximum tenor of 12 months. It also offers a maximum loan amount of ₦ 10 million.
2. Asset Financing
Asset financing is pretty much straightforward. It involves the practice of using a company’s balance sheet assets such as investments or inventory as security to borrow money or take out a loan against what it already owns. With asset financing, business owners are provided with a secure and easy way of getting working capital for their business. While it may seem appealing on paper, it is important to note that in the event of the borrower defaulting on their loan payment, the asset may serve as collateral.
There are five types of asset financing:
- Hire Purchase: Hire Purchase usually comes in handy for businesses that want to expand but do not have the resources to purchase more equipment. In this case, the lender purchases the asset on behalf of the borrower. Over an agreed period of time, the borrower makes installment payments until the entire price is covered.
- Equipment Lease: Equipment leasing is a type of financing in which businesses rent equipment rather than purchase it outright. One can lease expensive equipment such as machinery, vehicles, or computers for their business. Equipment leases are popular options for asset financing because of their freedom and flexibility.
- Operating Lease: Quite similar to the equipment lease type of asset financing, an operating lease is an agreement to use and operate an asset without necessarily transferring ownership. Common assets that are leased include real estate, automobiles, aircraft, or heavy equipment.
- Finance Lease: This is also referred to as a capital lease or sales lease, a finance lease is a type of commercial lease in which a financial institution is the legal owner of an asset, and the user rents the asset for an agreed-upon period of time. While it is also similar to an operating lease, the main difference is that under a finance lease, the lender conveys ownership of the asset. Under an operating lease, the lender does not own the equipment.
- Asset Refinance: Asset refinance is a method by which a business can raise funds against assets that it already owns. This form of funding is available on a wide range of business assets, including vehicles, property, tools, IT equipment, and other machinery.
3. Government-sponsored Intervention Funds
Another way of assessing collateral-free loans is by taking advantage of intervention funds. Intervention funds are used to finance working capital needs, asset acquisition, and business expansion. In Nigeria, the Federal Government has put in place several initiatives to provide subsidized loans to Micro, Small, and Medium Enterprises (MSME) at a single digit of 9% per annum.
While some may require collateral, there are some that do not. Among the financial institutions handling the intervention funds for the government are the Development of Nigeria (DBN), Bank of Industry(BOI), Central Bank of Nigeria, Small and Medium Enterprises Development Agency of Nigeria, (SMEDAN), and a host of others.
Steps to Getting a Small Business Loan Without Collateral
Having gone through the different ways of accessing loans without needing collateral, it is important to point out that there are steps the borrower needs to take to ensure seamless accessibility. Before applying for one of these loans, it’s important to do your research so you know what to expect.
It is also important to note that given the risk factor involved, lenders may charge higher fees or interest rates for no-collateral business loans.
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Know Your Options
The first step in getting a business loan requiring no collateral is to know which options are available. This means hours and hours of research. Non-collateral loans are offered by a variety of lenders, but loan terms and approval requirements can be very different.
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Review Your Business Financials And Put Your Documents Together
Having up-to-date financials will go a long way in ensuring that you get the kind of loan you desire. Some types of non-collateral small business financing may be more difficult to qualify for than others, so it is important to ensure that your financials are in order by evaluating your business and its overall financial position.
This would also mean checking your personal and business credit scores, updating your balance sheet, creating key financial documents such as a profit and loss statement and a cash flow statement as well as reviewing your business expenses and overall cash flow.
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Be Prepared for a Personal Guarantee
While you may be able to get a small business loan without having to offer collateral, that doesn’t mean the lender won’t ask for other conditions. Specifically, you may be asked to sign a personal guarantee. A personal guarantee is an agreement that you’ll personally repay the debt taken on by your business. Personal guarantees are often a requirement for no-collateral loans and small-business credit cards. As the lender has no collateral it can attach if you don’t pay, the guarantee gives it leeway to sue you personally to collect an unpaid debt.
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Consider the Terms Carefully
Having applied for and gotten the loan, one very vital step you should take before appending your signature is to read through the terms and conditions. In reviewing the loan agreement, it is important to pay attention to things like the interest rate, the payment schedule, and the loan term.
