The rise of alternative business financing can be largely attributed to the fact that most small business loans from alternative lenders are unsecured, which means they do not require collateral. Borrowers do not have to risk losing their homes or cars in order to obtain the funding they need to grow their businesses. Traditional lenders, namely banks, typically do not approve loans if the applicant does not possess something very expensive that the bank can sell should the loan not be paid back. It doesn’t matter how well the applicant’s business is performing or whether or not the applicant has a proven track record in paying off debt. No collateral, no loan.
The main purpose of collateral is to ensure that the bank will not lose money, even if the borrower’s business fails. Collateral is also supposed to be a mark of responsibility, almost like a guarantee that the borrower will do whatever is necessary to make sure the business loan is put to good use. Recent research, however, found that 67.6% of US business owners prefer alternative financing to traditional financing. That’s a lot of irresponsible business owners, right?
Here are four reasons why collateral should not be required for a small business loan:
Running a business is risky enough as it is. You don’t have to have business experience to imagine the stress that comes with having to pay back a small business loan while waiting to see if your investment produces results. This investment must be carried out exactly as planned, meaning it requires 100% of your focus. This isn’t easy to accomplish considering you’re already worrying about loan payments on top of your endless responsibilities as a business owner. What could possibly make this investment even more stressful? How about knowing that in addition to your business, your overall well-being is on the line?
Unlike banks, alternative business lenders understand the role of stress in successfully executing an investment. Your mind must be completely at ease if you intend to bounce your business back on track following the slowdown in operations that likely occurred after your loan was spent. The thought of losing your home doesn’t exactly help you in that department.
NOT A MARK OF SUCCESS
The surprisingly high amount of business owners who favor alternative financing suggests that, contrary to what banks might think, the ability to provide collateral is not a mark of true success. There are plenty of successful business owners who do not own property, fancy cars, or expensive equipment. This is especially true for up-and-coming businesses or white collar businesses located in big cities. Most new businesses do not purchase property until they have been operating for several years.
Rather than a mark of success, the will to provide collateral to a bank should be viewed as a mark of ignorance. This is because the terms of bank loans are extremely generic and non-negotiable, regardless of the inevitable dips in revenue virtually all businesses experience at some points of the year. Agreeing to these terms is a lot more risky than, say, agreeing to flexible terms that can be customized based on the unique circumstances of your industry. In fact, it’s safe to assume there are many business owners who can provide collateral to banks but choose not to because the terms are a recipe for disaster. If you are going to risk giving up your car or home, at least do it for a lender that is willing to make paying off the loan as easy as possible.
Alternative business lenders judge applicants almost exclusively on the performance of their businesses, a far more accurate way to gauge success.
THE BANK IS NOT YOUR PARTNER
“The bank doesn’t care about your business,” billionaire Mark Cuban famously said in 2013. Nothing validates this statement more than the requirement of collateral. Banks are supposed to place their trust in borrowers who provide collateral but how can a bank be on your side if it is perfectly fine with ruining your life as soon as your investment doesn’t work out? Collateral suggests that a bank has zero faith in the business plan that took so much time to compose. If a bank really trusted your intended investment, it would evaluate borrowers based on the strength of your business plan, which contain myriad facts and figures to prove that your business loan will lead to a significant increase in revenue.
BETTER REWARDS THAN YOU EVER IMAGINED
The biggest selling point of secured business loans is the convenient terms they offer. Borrowers who can provide collateral are traditionally rewarded with longer terms, lower monthly payments and lower interest rates. Alternative lenders, however, offer numerous financing programs that don’t even have monthly payments or due dates. A Merchant Cash Advance, for example allows your business to receive a lump sum today in exchange for a percentage of future credit card sales. This program is ideal for businesses looking to make some investments to prepare for a massive surge in sales. You could take out the merchant advance several months beforehand, even if sales are down because a fixed percentage of each credit card batch gets taken therefore when business is slow, so is the repayment and vice versa.
A Merchant Cash Advance additionally comes with two major benefits that collateral can’t buy you: Your business could be approved in under 24 hours and funding will reach your bank account in a matter of days. You’d think collateral would prompt the bank to process your application faster but no, you would still have to wait months just to learn you’ve been rejected.
NO COLLATERAL, NO PROBLEM!
Clients of United Capital Source have repeatedly proved that an inability to provide collateral is in no way an indicator of irresponsibility or carelessness. These business owners were approved for funding because of the success they had already achieved and went on to show that with the right terms, there’s no reason a successful business owner won’t be able to pay off debt. Trust the business funding experts at UCS when they say that the benefits of a secured business loan pale in comparison to the benefits of choosing an alternative lender to fund your next major investment!