Until recently, lenders expected loan applicants to put up some form of collateral when applying for a business loan. That meant business borrowers routinely had to risk a high-value asset to get the funds required to operate their companies. While that’s still the expectation most of the time, new types of commercial loans requiring no collateral are cropping up all the time.
Lenders That Require a General Lien Instead of Collateral
It’s common among online and some smaller lenders to ask borrowers to agree to a general lien rather than require them to give up rights to an asset in case of loan default. The general lien does not require you as a business owner to obtain a valuation for the business or any of your equipment. The second thing some lenders now require in lieu of requesting collateral is a personal guarantee from the borrower.
A personal guarantee is a legal document that gives the lender the right to pursue your personal assets if you default on a business loan. When you agree to this, it means you must pay any legal, collection, or other costs related to the loan in addition to bearing 100 percent of the responsibility of repaying it.
What Alternative Lenders Look for Instead of Collateral
When a borrower receives a traditional loan that requires collateral, the lender will determine the loan-to-value ratio using the value of the item pledged. Since this doesn’t exist with non-collateral business loans, lenders evaluate creditworthiness in other ways. Some of these include the company’s current cash flow, results of the business and personal credit files, and the health of the business in general. This sometimes makes it possible for lenders to offer larger loans than they would have with loans requiring collateral.
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