Three Types of Loans to Consider if You Don’t Have Collateral
In the eyes of any lender, there’s always some risk for any type of loan. Even though there are strict guidelines and requirements, having collateral to secure one is perhaps the most important requirements from a financial institution.
Having collateral pretty much guarantees the loan for both parties involved. From a borrower’s point of view, collateral may mean the difference between of being approved or rejected, while the lender is guaranteed to take possession of the collateral in the event of default.
Nonetheless, according to the Business Development Bank of Canada (BDC), there are a series of loans available for proprietors who don’t have tangible assets. Here are three to consider:
1. Working Capital Loans
Similar to a short-term business loan, working capital loans are available to cover expenses such as cash flow during anticipated slower seasons and growth investments. According to the Business Development Bank of Canada (BDC), some financial institutions don’t require collateral for working capital loans if it’s for a small amount, the loan can be secured with inventory or forecasted cash flow, or if a business (or the entrepreneur) has a solid credit score or significant net worth. Additionally, lenders may also put into consideration the company’s cash flow and how much they safely manage to borrow.
2. Market Expansion Loans
A market expansion loan is another source of funding that doesn’t always require collateral. It’s available primarily for businesses that require capitol to grow, which might include expansion into the market, and launching a new location or product. Plus, terms often include a flexible repayment schedule that’s structured so “payments to go up or down based on your cash flow” and there are no additional fees if the loan is paid off early.
3. Growth and Transition Capital Loans
Growth and transition capital loans are devised for rapidly growing businesses or start-ups that require working capital but don’t have a lot of tangible assets. According to the BDC, the loans are a hybrid of a conventional debt and equity financing. It also reports “that repayment terms are largely based on cash inflows and may also entail cash flow sweeps, and flexible monthly or balloon payments.”
While there are several other types of loans that don’t require collateral, it’s best to learn about all your options with a local bank lender or financial institution.