Which Small Business Loans Don't Require Collateral?

Small business owners often compare different types of financing when planning to borrow. Two options that frequently come up are SBA loans and traditional bank loans.

These loan types share some similarities but differ in terms of structure, eligibility, and purpose. Understanding how they work can help clarify the differences between an SBA loan vs bank loan.

This article explains the key features of SBA loans, how they compare to conventional business loans, and how to evaluate which may fit specific business needs.

What Are SBA Loans?

SBA loans are business loans partially backed by the U.S. Small Business Administration. The SBA doesn't lend money directly. Instead, it works with approved private lenders such as banks, credit unions, and online lenders.

The SBA provides a loan guarantee, which means it agrees to repay a portion of the loan (typically 50% to 90%) if the borrower defaults. This guarantee reduces the lender's risk and makes it more likely that the lender will approve borrowers with limited credit history or fewer assets. However, SBA default rates surged to 3.7% in 2024, the highest since 2012, driven by relaxed underwriting and increased subprime lending.

There are several types of SBA loans, each serving different business needs:

• SBA 7(a) Loan: The most common SBA loan. Used for working capital, equipment, real estate, or debt refinancing. Loan amounts up to $5 million.
• SBA 504 Loan: Used to finance fixed assets such as commercial real estate or machinery. Offers long-term, fixed-rate financing.
• SBA Microloan: Provides smaller loan amounts (up to $50,000) for startups, smaller businesses, or those in underserved communities.

When comparing an SBA loan vs conventional loan, the key difference is the government guarantee. This guarantee can make SBA loans more accessible to businesses that don't meet traditional lending standards.

What Are Conventional Business Loans?

Conventional business loans (also called traditional business loans or commercial loans) come directly from banks, credit unions, or other financial institutions without government backing.

A conventional loan is financing where the lender decides whether to approve the loan based entirely on the borrower's financial profile. The lender sets the terms, reviews the application, and assumes full risk if the borrower fails to repay.

Lenders offering conventional business loans use their own criteria to determine approval. This includes reviewing the borrower's credit score, business financials, time in business, and repayment history.

Key characteristics of traditional business loans include:

• Funded directly by banks or private lenders
• Not backed by any government agency
• Approval depends on the lender's risk assessment
• Often require collateral for larger loan amounts
• May carry both fixed and variable interest rates
• Commonly used for expansion, equipment, or property purchases

Key Differences Between SBA and Bank Loans

SBA loans and conventional loans differ in structure, approval requirements, and terms. Here's how they compare:

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1. Structure and Government Backing

The fundamental difference in an SBA loan vs bank loan comparison is the government guarantee. With SBA loans, the government agrees to repay a portion if the borrower defaults. This reduces risk for lenders. Recent data shows a 38% decline in average SBA loan size since 2021 (from $704,581 to $435,827), driven by higher interest rates and cautious borrowing.

Conventional loans are backed entirely by the lender, with no outside guarantee. This higher risk often leads to stricter approval requirements.

2. Interest Rates and Fees

SBA loans have maximum interest rates set by the government. These rates are tied to the prime rate plus an additional percentage, typically ranging from 7-11% depending on loan amount and term.

Conventional loan rates are set by individual lenders without government limits. Rates typically range from 6-13% or higher, based on the borrower's creditworthiness.

Additional costs to consider:

• SBA loans: Include guarantee fees (0.25-3.5% of the guaranteed portion)
• Conventional loans: May include origination fees (1-3% of loan amount) and prepayment penalties

3. Repayment Terms

SBA loans generally offer longer repayment periods:

• Real estate: up to 25 years
• Equipment: up to 10 years
• Working capital: up to 10 years

Conventional loans typically have shorter terms:

• Real estate: 5-10 years
• Equipment: 3-7 years
• Working capital: 1-5 years

Longer terms mean lower monthly payments but potentially more interest paid over time.

4. Eligibility Requirements

SBA loans and conventional loans have different qualification standards:

For SBA loans:

• Credit score: Usually 620-640 minimum
• Business history: Often at least 1 year in operation
• Revenue: Varies by lender, commonly starts around $100,000
• Other requirements: Must be for-profit, operate in the U.S., and meet SBA size standards

For conventional loans:

• Credit score: Typically 680+ minimum
• Business history: Usually 2+ years required
• Revenue: Often $250,000+ annual revenue
• Documentation: Detailed financial statements and strong cash flow

In the SBA loan vs bank loan comparison, SBA loans tend to be more accessible for newer businesses or those with lower credit scores.

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Who Qualifies for Each Option?

Understanding qualification requirements helps determine which loan type is more suitable for your business situation.

SBA loan qualifications:

• Personal credit score in the 620-640 range
• Business operating for at least 12 months (some exceptions for startups)
• Demonstrated ability to repay the loan
• For-profit business located in the U.S.
• Personal guarantee from owners with 20%+ ownership

Conventional loan qualifications:

• Personal credit score of 680 or higher
• Business operating for at least 2-3 years
• Strong, consistent revenue history
• Detailed financial documentation
• Collateral often required
• Solid debt-to-income ratio

The SBA loan vs business loan qualification difference centers on flexibility. SBA loans accommodate businesses with less established histories, while conventional loans favor businesses with proven track records.

Refinancing from SBA to Conventional Loans

Some businesses consider refinancing an SBA loan to a conventional loan after improving their financial position. This means replacing an SBA-guaranteed loan with a new loan from a private lender without government backing.

Potential advantages of refinancing include:

• Lower interest rates if the business has improved its credit
• Removal of SBA-specific restrictions on how funds can be used
• Elimination of SBA guarantee fees

Possible drawbacks include:

• Stricter qualification requirements
• Shorter repayment terms leading to higher monthly payments
• Potential prepayment penalties on the original SBA loan

When considering whether to refinance SBA loan to conventional financing, businesses should compare total costs, including fees, interest rates, and monthly payment amounts.

Pros and Cons of Each Loan Type

Both SBA loans and conventional bank loans have distinct advantages and disadvantages:

SBA Loan Pros:

• Lower down payments (typically 10-15%)
• Longer repayment terms
• More accessible for newer or smaller businesses
• Capped interest rates

SBA Loan Cons:

• Lengthy application process (30-90 days)
• Additional paperwork requirements
• SBA guarantee fees
• Restrictions on how funds can be used

Conventional Loan Pros:

• Potentially lower interest rates for well-qualified borrowers
• Faster approval process (2-4 weeks)
• Fewer restrictions on fund usage
• No government paperwork or guarantee fees

Conventional Loan Cons:

• Stricter eligibility requirements
• Higher down payments (typically 20-30%)
• Shorter repayment terms
• Less flexibility for businesses with limited history

When comparing SBA loan vs commercial loan options, businesses must weigh these factors against their specific needs and qualifications.

How to Choose the Right Option

Selecting between an SBA loan and a conventional business loan depends on several factors:

Assess Your Credit and Revenue

Your credit score and business revenue significantly impact which loan type you might qualify for:

• Credit scores below 680 may find SBA loans more accessible
• Well-established businesses with strong credit may benefit from conventional loan rates
• Newer businesses often find SBA loans more attainable

Consider Timing Needs

The urgency of your funding requirements matters:

• Need funds quickly? Conventional loans typically process faster
• Can wait 30-90 days? SBA loans might offer better terms
• Application complexity is greater with SBA loans

Match Loan Purpose to Loan Type

Different loan types work better for specific purposes:

• Real estate purchases benefit from SBA 504 loans' long terms
• Working capital needs might be met by either loan type
• Equipment purchases could use either, depending on amount and timeline

Making Your Decision

When deciding between an SBA loan vs bank loan, consider these key points:

• Financial profile: SBA loans work well for businesses with less established credit or shorter operating histories. Conventional loans favor businesses with strong financials and credit.
• Funding timeline: SBA loans take longer but may offer better terms. Conventional loans fund faster but may have stricter requirements.
• Long-term plans: SBA loans provide longer repayment periods, making them suitable for major investments. Conventional loans often have shorter terms but may offer competitive rates for qualified borrowers.
• Collateral availability: SBA loans may be more flexible when collateral is limited. Conventional loans typically require specific collateral.

Both SBA loans and conventional business loans can provide valuable financing. The best choice depends on your business's specific situation, qualifications, and needs.

FAQs About SBA Loans vs Bank Loans

What is the minimum credit score needed for an SBA loan?

Most SBA lenders look for personal credit scores of at least 620-640, though requirements vary by lender and loan program.

How long does it take to get approved for an SBA loan compared to a conventional loan?

SBA loans typically take 30-90 days for approval and funding, while conventional bank loans often complete in 2-4 weeks.

Can startups qualify for SBA or conventional business loans?

Startups may qualify for certain SBA programs like microloans, while conventional loans typically require at least 2 years in business.

What are the maximum loan amounts available through SBA vs conventional loans?

SBA 7(a) loans offer up to $5 million, while conventional loan maximums vary by lender and are based on the business's financial strength.

Is collateral required for SBA and conventional business loans?

SBA loans may be approved with limited collateral if other aspects of the application are strong. Conventional loans typically require specific collateral, especially for larger amounts.

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When business owners face a cash crunch, the instinct is often to find fast capital. Unfortunately, that sometimes leads to risky strategies like loan stacking, where multiple loans from different lenders compound interest, repayment schedules, and financial stress. But the truth is that there are smarter, safer ways to improve a business’s cash flow that don’t require stacking or sacrificing long-term stability. Cash flow problems can arise even when a company is profitable due to delays in collecting receivables and other factors, making addressing the root causes of cash flow issues essential. The key difference between cash flow and profit is that profit indicates the amount left after expenses, while cash flow indicates the net flow of cash into and out of a business.

This guide walks you through proven strategies business owners use to regain control of cash flow and build financial resilience. If you’re unfamiliar with the broader risks of loan stacking, start with our foundational guide: Loan Stacking Explained: Protecting Your Small Business from Debt Risks.

Understanding Cash Flow

Cash flow refers to the movement of money into and out of a business over a specific period. It’s a critical financial metric that indicates a company’s ability to generate and manage cash effectively. Cash flow can be either positive or negative. A positive cash flow means more money is coming into the business than going out, which is a strong indicator of financial health. Conversely, a negative cash flow indicates that outflows exceed inflows, which can signal potential financial trouble.

Understanding cash flow is essential for making informed investment decisions, financing, and other financial activities. By closely examining cash flows, businesses can ensure they have enough liquidity to cover operating expenses, invest in growth opportunities, and navigate unexpected expenses. In essence, mastering cash flow management is key to maintaining a healthy cash flow and ensuring long-term business success.

Audit and Optimize Your Operating Expenses to Manage Cash Flow

The first place to start is your internal operations. Review your expense categories and identify recurring charges, outdated subscriptions, or unnecessary costs that can be reduced or eliminated. Many business owners discover thousands in potential savings hidden in plain sight and capital that can be reallocated to cover pressing needs without borrowing another dollar.

Additionally, maintaining optimal stock levels can free up cash for other operational needs, ensuring resources are not tied up unnecessarily. Automating financial processes streamlines cash flow management and improves accuracy, making identifying and acting on inefficiencies easier. Optimizing operating expenses can positively impact the cash flow, enhancing the cash generated from core business operations.

Automating Financial Processes

Automating financial processes can significantly streamline financial management and improve cash flow. Financial management software solutions can automate invoicing, payment processing, and expense tracking tasks. This automation reduces errors, increases efficiency, and provides real-time visibility into a company’s financial performance.

By automating these processes, businesses can free up time and resources to focus on strategic decision-making and growth initiatives. Additionally, automation helps identify areas for cost savings and optimize financial operations, ultimately leading to improved cash flow. Embracing financial automation is a smart move for any business looking to enhance its financial health and ensure more money is available for critical needs.

Negotiate and Stretch Your Payables

Cash flow isn’t just about what’s coming in; it’s also about timing what’s going out. Negotiating payables can help bridge cash flow gaps by providing accessible funds to manage unexpected expenses or seasonal fluctuations. If you have strong relationships with suppliers, ask for longer payment terms or early payment discounts. Even stretching payables from Net-15 to Net-30 can create a meaningful short-term buffer.

Implementing strategies to collect receivables promptly is crucial for maintaining a healthy cash flow, as delayed payments can disrupt liquidity. If a company’s cash inflows exceed its outflows, its net cash flow is positive, which is a strong indicator of financial health.

Speed Up Your Accounts Receivable Process

The faster you get paid, the more liquidity you have. Improve your invoice cycle by:

• Sending invoices immediately upon delivery of goods/services
• Offering small discounts for early payments
• Automating reminders for overdue invoices

Even modest improvements here can make a major difference in day-to-day operations. Speeding up accounts receivable can significantly increase the cash generated from core operations, ensuring your business has the necessary funds to sustain and grow.

Use a Business Line of Credit for Flexibility

Unlike stacked loans, a business line of credit gives you flexible access to capital without the burden of overlapping repayment schedules. You borrow only what you need, when you need it, and repay on your own timeline. It’s an ideal solution for seasonal businesses, inventory purchases, or bridging timing gaps in receivables.

When securing a line of credit, businesses should consider factors such as interest rates, fees, and creditworthiness to ensure they make the best financial decision. Additionally, a business line of credit can positively impact financing cash flow by providing the necessary funds for debt issuance, equity transactions, and dividend payments, thereby improving the company’s financial health and capital management.

Refinance Existing Loans

If you already have a loan, speak with your lender about refinancing. Refinancing can help you:

• Combine multiple payments into one
• Lower your interest rate
• Extend your term to reduce monthly obligations

Refinancing shows financial responsibility and strengthens your lender relationship—two key factors that can support future growth. Additionally, refinancing can impact your net income by reducing interest payments, which in turn can improve your cash flow.

Create Rolling Forecasts to Stay Ahead

Great cash flow is often the result of great forecasting. Create a 3, 6, and 12-month projection of your expected revenues and expenses. This helps you plan ahead and build reserves before you hit another crunch. Use tools or templates to make this a recurring monthly habit—not just something you do when you’re in trouble.

Regularly monitoring cash flow against budgeted figures allows businesses to proactively identify variances and adjust their strategies. The cash flow statement is used to judge how well a company can pay its debts and manage its operating expenses, making it an essential tool for financial planning. Rolling forecasts can also help manage investing cash flow by planning for long-term investments and ensuring the business is committed to future growth.

Build a Long-Term Relationship with a Lending Partner

If funding is truly needed, work with a lender who prioritizes your long-term success. At Fundwell, we vet every lender in our network and avoid working with funders who promote stacking or predatory terms. We’ll help you navigate financing options in a way that protects your business, and not just patch today’s problem. It’s often a good idea to secure a line of credit before you need it to get better terms when your business is healthy.

A transparent lending partner can also help you manage cash flow effectively by identifying potential risks and providing strategies to mitigate them.

Better Cash Flow Begins with Better Decisions

Loan stacking might seem like a quick solution, but it often leads to long-term damage. From strained lender relationships to missed opportunities for growth, it’s a cycle worth avoiding. With a combination of smarter internal practices and strategic financing, you can boost your cash flow, protect your business, and build a foundation for sustainable success.

If you need help applying these strategies to your business, speak to a Fundwell lending expert today or begin your online application. We’ll match you with transparent funding options that are designed to protect your cash flow; not hurt it.

I’ve spent the past 12 years deeply embedded in the merchant financing industry, engaging with thousands of small business owners. While every entrepreneur’s story is unique in all these interactions, I see common trends, particularly around managing cash flow. Financial crunches are, unfortunately, an inevitable reality in business, often leading entrepreneurs to seek bridge loans or financing.

With that, one practice I’ve seen on the rise that’s concerning is loan stacking.

What is Loan Stacking?

Loan stacking is when business owners take out multiple loans from different lenders simultaneously, usually without disclosing each loan to every lender involved. More often than not, this happens because brokers aggressively market additional financing to business owners and downplay or misrepresent the financial risk involved.

For instance, a small business might borrow money to cover immediate operational costs, purchase inventory, or seize growth opportunities. Soon after, a broker or another lender presents the opportunity to secure even more capital. The temptation to alleviate immediate financial stress can feel impossible to resist. Unfortunately, many business owners do not thoroughly evaluate how the compounded repayments from multiple loans will affect their bottom line and cash flow.

Loan Stacking Risks & Why It’s Bad for Your Business

1. Cash Flow Strain: Multiple loans mean overlapping repayments, often daily or weekly, that quickly escalate into unmanageable financial pressure. I’ve seen countless businesses unintentionally get stuck in a cycle of borrowing money to repay existing loans and end up in chronic financial instability.
2. Damage to Credit and Future Financing: Loan stacking increases the likelihood of missed payments and defaults. Even one default can wreak havoc on a business’s credit score and limit its ability to get affordable financing in the future—essentially, loan stacking risks your long-term growth for short-term relief.
3. Breaching Agreements and Legal Consequences: Most lenders explicitly prohibit loan stacking in their loan agreements. By failing to disclose additional financing, you risk immediate default on your loan terms, potentially facing severe financial penalties, legal action, and irreparable damage to your relationship with your lenders.

Why Do Business Owners Stack Loans?

Understanding why loan stacking occurs is crucial. Most often, business owners aren’t intentionally irresponsible; they genuinely believe in their company’s growth prospects and best interests. When facing an immediate cash crunch, the immediate injection of liquidity from an additional loan feels like a sensible solution. This optimism, while admirable, can quickly become dangerous without a thorough assessment of how repayments will impact cash flow.

Additionally, aggressive and unethical loan brokers exacerbate the problem. These brokers reach out to business owners and push additional funding by misrepresenting the consequences and telling owners it’s a common and harmless practice.

The Safe Alternatives to Loan Stacking

Instead of loan stacking, safer and more sustainable financing options do exist, including:

Open Dialogue with Your Current Lender: The first step should always be transparency. Your existing lender is invested in your success and will likely offer practical solutions, such as refinancing your existing debt, restructuring your payments, or providing additional capital to help alleviate your current financial situation.

Refinance Your Existing Loans: Refinancing allows you to consolidate multiple loans into a single repayment schedule, often with more favorable terms or lower interest rates. This reduces financial stress and streamlines cash flow management.

Use Revolving Credit Solutions: Business lines of credit offer the flexibility to borrow precisely the amount you need, exactly when you need it, without committing to fixed repayments on loans you may not fully require. It’s a practical and controlled way to manage liquidity without falling into a cycle of loan stacking.

Building Trust-Based Relationships with Your Business Lender

In my experience, businesses that successfully navigate financial hardships have a common trait: they’ve built strong, transparent relationships with ethical lenders. During challenges like unexpected cash crunches, trustworthy lenders actively assist, sometimes even proactively suggesting solutions or refinancing options. This type of partnership turns financing from just covering short-term gaps into a strategic tool for long-term growth.

At Fundwell, our core commitment is to connect you with ethical, supportive lenders. We vet our lending partners meticulously, ensuring they uphold the highest ethical standards and genuinely care about your business’s long-term health and growth.

Final Thoughts on Loan Stacking: Prioritize Transparency and Responsibility

Loan stacking is fundamentally incompatible with sustainable business growth. It’s tempting as a quick solution, but it ultimately exposes your business to profound financial and operational risks. The solution is simple yet powerful: be transparent with lenders, think through your financial decisions, and build strong, supportive lending relationships.

By adopting these responsible borrowing practices, you’ll not only safeguard your business against unnecessary risks but also set the stage for consistent, sustainable growth and long-term success.