3 Complications Caused By Having A Lack Of Collateral

Happy New Year! With 2024 now in full swing, you’re likely thinking of ways to turn this year into your company’s best year ever. Is growing your brand one of your New Year’s Resolutions? It is for most small business owners. The main problem with ensuring business growth is that the process can be expensive. As a result, many entrepreneurs head to their local banks to inquire about business loans. That’s when they are confronted with the scary C-word: collateral.

Without sufficient collateral to offer lenders, obtaining a loan can be challenging for any business owner. Here are three complications caused by having a lack of collateral:

1. You will likely receive a pretty high interest rate.

If you’re lucky enough to be approved for a business loan without collateral, you can expect to receive a scarily high interest rate. This is because when collateral is unavailable, lenders perceive the loan as riskier. Collateral offers bank loan officers a nice cushion. It serves as a safety net in the event a loan isn’t repaid. A higher interest rate may compensate for the perceived risk of enduring potential losses.

At the end of the day, a higher interest rate means a much more expensive loan for the borrower. This makes it more challenging to manage cash flow and allocate funds for growth initiatives. A loan that is approved without collateral is called an “unsecured loan”. Approval is generally contingent on a borrower’s credit score. Naturally, it would have to be quite high.

2. It will limit your loan amount.

The absence of collateral can also limit the amount of funding that you can secure as a small business owner. Lenders may be hesitant to extend larger loan amounts without the security of collateral, as it increases their exposure to risk. As a result, you may find yourself unable to access the capital your need to expand operations, invest in new equipment or pursue other growth opportunities.

Insufficient funding can hinder your ability to expand into new markets, launch new products or services or invest in marketing and advertising efforts. Your business may stagnate, unable to compete effectively or capitalize on emerging trends in the market.

3. It may negatively impact your credit score.

If your business is just starting or you have limited credit history, your lack of collateral can pose a significant hurdle. Without a track record of borrowing and repaying loans, lenders may be hesitant to extend credit, further exacerbating the challenges of securing financing. Building a strong credit history is essential for accessing future funding opportunities and establishing a solid financial foundation for the business.

As well, “if you default on an unsecured loan, your credit score will be negatively affected,” Annie Millerbernd and Jackie Veling warn on NerdWallet.com, “The remaining loan balance can be sold to a debt collection agency, prompting collections calls from an unfamiliar company, and you may be sued in an attempt to collect on the debt.”

No collateral is necessary when applying for a merchant cash advance!

With Synergy Merchants’ unique merchant cash advance program, you don’t need any collateral in order for you to be approved. To learn more, please don’t hesitate to call us at 1-877-718-2026 or email us at info@synergymerchants.com. You can also apply online for a free, no obligation quote!