No Assets, No Problem

When it comes to small business loans, there are two major types: unsecured and secured.  The primary difference between secured and unsecured loans is that a secured loan requires an asset to act as a guarantee. Many small business loans require the borrower to provide personal collateral. This generally comes in the form of tangible or intangible assets that the lenders can sell to get its money back if you stop paying the loan. This offers the lender peace of mind when a borrower default on their loan.

What if you have just started your own business without any collateral to put up as a guarantee? Can you still get financing? The short answer is yes. There are in reality lenders out there who are willing to offer you funding without collateral, provided that your business has proven cash flow, stable management, solid profits and growth potential. However, they are not as easy to find nor as readily available as a standard secured loan.

How Difficult Is It to Get a Small Business Loan Without Collateral?

As mentioned above, there are limited options for a non-collateral loan. And, even then, lenders who offer unsecured loans seek to reduce their risk by imposing a few pre-requisites that business owners have to satisfy in order to qualify for the loan, including:

  • A personal guarantee: If you take out a loan with a personal guarantee instead of collateral, you will be making a guarantee that you, as an individual, will pay the debt should your company default on the loan.
  • 4 C’s of credit: Character, capacity, capital and condition which will be used to assess your creditworthiness as a borrower.

What Information Do I Need for Unsecured Business Loan Application?

As with any type of loan, you will be asked to provide your company name and type of business entity, addresses and names for directors, previous records of accounts, and a detailed description of how you‘ll use your funds. it advisable to have the necessary documentation to hand before you apply.

What Happens If I Default on An Unsecured Business Loan?

For the first few late or missed payments, you will trigger fees, increased interest, and a warning letter from the lender. In the event of default, the lender can take legal action against you to reclaim some of all of the loan.

Here Are Various Small Business Loans Options That You Can Consider to Apply Without Collateral:

1. Microfinance/Microcredit

Microfinancing or microcredit is the extension of very small business loans (microloans) to borrowers who typically lack collateral and a verifiable business credit history. This concept was founded in Bangladesh in 1983 through the establishment of Grameen Bank. It is designed to enable borrowers to start a small business (micro-enterprise) with the loan amount usually ranging from RM500 to RM50,000. As it falls under the category of unsecured loan, they come with a much higher interest rate. But don’t let the interest rate prevent you from applying as some can be as low as 3.75% to 7.5%, depending on funding sources.

Due to the vital role of micro-enterprises play in the country’s economic growth, in early 2006, the Malaysian government with the cooperation of Bank Negara has encouraged the involvement of more and more financial institutions in providing microfinance/microcredit products to the public. Currently, there are seven commercial banks and three development banks which provide microfinance facilities:

Commercial Banks Development Banks
  1. Alliance Bank
  2. AmBank
  3. CIMB Bank
  4. Public Bank
  5. Maybank
  6. United Overseas Bank
  7. Bank Muamalat
  1. Agrobank
  2. Bank Rakyat
  3. Bank Simpanan Nasional

2. Seed Funding

In many cases, an individual might apply for a personal loan to fund their business idea. However, when that option isn’t viable, this is when seed funding comes into the picture. Seed funding, also known as seed capital is funding collected from investors and used to start a business. It’s a type of equity-based financing, where investors commit their capital; in exchange for an equity interest or stake in a company.

The capital is usually raised from friends, family members or in some cases, angel investors. The latter is the most important player in seed funding for their capability to provide a substantial amount of capital.

Here are some of the seed funding options available in Malaysia, they are Business Startup Fund (BSF), Cradle Fund, and Business Growth Fund (BGF).

3. Grants

Unlike regular business financing, grants require no repayment. However, not to be mixed up with a donation, a grant is given to a small business on the grounds often concerning the profit or growth margin of the recipient business, meaning you will need to work on a tight timeline and keep the provider of the grant posted constantly so that they are aware of your business’s progress. The failure to meet the predetermined milestones may incur heavy repercussions such as halting the release of your funds or in some extreme cases, terminating your access to the grant.

In Malaysia, the government has launched a lot of financial aids and grants in 2021 specifically to help small and medium businesses to mitigate the economic impact of the COVID-19. You can find a list of the government grants and how to apply for them here.

4. Personal Loan

The majority of personal loans in Malaysia do not require collateral from borrowers. However, the higher interest rate from such a loan (for eg. Credit cards) can make such financing prohibitive if the balance is not paid in full every month. This option isn’t viable only if you have poor personal credit history.

Want to know if you’re financially eligible for a business loan? Talk to our advisor to find out more.

Avex Credit is a licensed money lender in Malaysia under the purview of the Ministry of Housing and Local Government and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal, mortgage and business loans that are tailored to meet your specific needs.