How to Get Small Business Loan For Startups without collateral: When you need a small-business loan, whether to fund your next stage of growth or to keep your company afloat during an unexpected crisis, one thing to consider is whether you’ll be required to provide collateral.
Collateral serves as security for the lender in the event that you fail to repay the loan for any reason. If your company lacks assets that could be pledged as collateral, obtaining a no-collateral business loan may be your top priority.
Fortunately, there are business loans available that do not require collateral as a condition for approval. Before applying for one of these loans, do your homework so you know what to expect.
Get Small Business Loan
Despite the enduring romance of the rags-to-riches success story, many entrepreneurs receive some assistance in building their startups.
Ambition and grit are essential, but these entrepreneurial characteristics do not guarantee the immediate cash flow that a business may require. What you should think about is some crucial initial financing for new businesses: business loans.
Business loans are one of the most common types of financing available to entrepreneurs looking to start a business or support existing operations. However, deciding whether to apply for a business loan is a major decision for any business owner and should not be taken lightly.
This post will look at the many factors that go into deciding whether applying for a business loan is right for you and your company, as well as walk you through the loan application process.
Why You Should Get a Business Loan
To achieve your business objectives, you may require more than grit and elbow grease. You will also require funds. Small business owners frequently use business loans to fund their operations when they lack cash flow.
According to the US Small Business Administration (SBA), over 61,000 loans were made to small business owners in the fiscal year 2021.
Are you unsure whether a loan is right for you? Here are a few red flags that you should hire one:
- Poor cash flow: If you don’t have enough working capital to cover inventory or basic operating expenses, a loan could help.
- Advertising costs: Advertising is necessary for every small business, but it quickly adds up. Fees may necessitate the use of a bank loan or a business credit card.
- Expensive equipment costs: Businesses frequently use loans to fund expensive equipment used in the manufacturing process.
- Hiring: Strong team players contribute to your company’s culture, operations, and success; however, they can be costly. A loan can assist you in hiring the right people to help your business grow.
- Emergency funds: The unexpected, such as equipment failures or natural disasters, can happen at any time. A loan may be useful to keep your business running during these difficult times.
It takes time to apply for a business loan. However, there are several steps you can take to prepare yourself before submitting an application, regardless of the type of loan you’re applying for.
Applying for a business loan can take from a few minutes to several hours, depending on the lender. Taking on a potentially significant financial obligation at the outset of a new venture, on the other hand, is a significant decision, particularly for entrepreneurs launching completely untested business ideas.
A little planning now can save you a lot of time and effort later on.
How to Get Small Business Loan
Below are the steps to follow in order to get a small business loan without collateral for startups:
#1. Calculate How Much You Need
Before applying for a business loan, use a loan calculator to determine how much funding you require. To answer this, you must first determine why you require a business loan.
The Federal Reserve Bank of New York discovered three primary reasons why US businesses take out loans:
- Business expansion (64%)
- Loan refinancing (45%)
- Operating expenses (45%)
For instance, assume you own a small but growing home-based catering business and want to open a single brick-and-mortar location where you will make and sell a variety of baked goods.
At an average cost of $95,000 for kitchen equipment alone, our fictitious catering company is looking at a significant business loan just to properly equip a single kitchen—and that’s before commercial real estate and licensing costs.
When calculating how much funding your company will require, it’s important to consider costs other than initial investments. A fully equipped professional-grade kitchen may cost an average of $95,000, but what about:
- Maintenance costs
- Utility costs
- Commercial Insurance
It’s easy to get caught up in the price of new hardware, but there’s a lot more to think about. This is especially important for businesses in industries with notoriously tight margins, such as food service, which can take longer to reach profitability, because it directly affects a borrower’s ability to meet repayment obligations.
#2. Write a Business Plan
Nowadays, most traditional business loans made available by private lenders will not be processed unless accompanied by a detailed business plan. A solid business plan serves as your company’s future road map. Without one, a prospective lender will struggle to determine whether your idea is commercially viable.
Several online lenders have emerged in recent years that do not require formal business plans as part of their loan application process or have eliminated the application process entirely.
For example, Shopify Capital does not require an application; eligible businesses are preapproved based on a variety of criteria associated with their Shopify storefronts, including total sales, in the same way, that Amazon Lending prequalifies certain Amazon merchants.
This type of financing can be an excellent option for established businesses looking to expand their footprint in a financially sustainable manner.
However, many lenders who do not require a formal business plan as part of the application process offers short-term loans with higher APRs (APRs). Higher APRs indicate that a greater portion of a loan’s repayments goes toward interest rather than principal.
Finally, only you can decide whether a business plan is required to support a small-business loan application. If so, you can get started on your business plan by downloading the handy template below.
3. Consider Terms of Repayment
The next step is to decide how you will repay your loan. Be honest with yourself about how much you can afford to pay each month. Take into account external factors such as seasonal lulls, supply chain disruptions, and even social shifts.
A lender will calculate your monthly payments based on a variety of factors, including:
- Loan Type
- Business profitability
- Credit history
- Business type and how long it’s been operating
- Business owners income
Your credit history demonstrates how responsible you are with debt repayment. It has a direct impact on your interest rates.
If you have good credit, you will almost certainly be able to get a lower interest rate on your loan.
If you have bad credit, your monthly payments will be significantly higher, and you may even be denied a loan.
Small business lenders recognize that each company is unique, which is why they provide so many loan options. The repayment period for each loan option varies. If you intend to take out a loan, figure out how long it will take to repay it.
Here are some common loan types and their average repayment periods:
- Term loans: up to ten years
- Microloans: up to 6 years
- Invoice financing for a few months
- Equipment financing: up to ten years
- SBA loans: up to ten years for working capital and fixed assets
- Credit lines for businesses: up to five years
Important Tips: Check with your lender to see if there are any prepayment penalties if you want to pay off your loan early. You don’t want to spend more money to get out of debt.
#4. Consult a Financial Advisor
Before you choose a loan, consult with a financial advisor. They will gain knowledge of the various financial institutions and loan programs. As a result, they can give you more personalized advice on which financing options are best for your business, as well as assist you in developing a plan to repay any debt you incur while remaining profitable in the long run.
#5. Decide/Choose a Type of Loan
If you’ve decided to apply for a business loan, the next decision is which type of financing is best for your company’s growth plans. There are numerous types of business loans, each with its own set of benefits.
Best for: Established businesses with significant financing requirements.
The term loan is the most common type of business loan. Term loans, which are typically repaid over two to ten years, are a dependable and common method of financing a business.
Traditional term loans, on the other hand, frequently have stringent eligibility requirements.
- Businesses are frequently required to operate for two years or more in order to demonstrate a track record of profitability.
- Many private lenders also prefer to service larger loans—up to $500,000—making term loans unattainable for smaller ventures that don’t require that much capital or for entrepreneurs with no track record of success.
- Most lenders require a minimum credit score, which is usually around 680.
- A traditional term loan can take anywhere from two weeks to two months to process.
Ideal for: small businesses with unique funding needs.
SBA loans are very similar to standard-term loans offered by private lenders. The main distinction is that SBA loans are serviced by lenders who have agreed to provide more favorable terms to groups that might struggle to obtain traditional small business financings, such as female entrepreneurs and minority business owners.
Loans made through an SBA-approved lender frequently require:
- A formal business strategy
- Real estate as collateral
SBA loans can have much longer terms than traditional term loans, with some having terms of up to 25 years. SBA loans are also typically smaller, ranging from around $10,000 at the low end to around $350,000 on average.
More so, SBA loans are typically more forgiving in terms of credit score, requiring a minimum of 650. While these loans are definitely more accommodating to small businesses, they can still take up to 90 days to process.
Online short-term and long-term loans
Ideal for: New businesses with poor credit.
Online loans have grown in popularity in recent years as entrepreneurs seek alternatives to traditional business financing. Lenders such as Funding Circle and OnDeck provide these types of loans. They are frequently unsecured, which means that no collateral or assets are required to obtain the loan.
There are numerous benefits to both short-term and long-term online loans:
- Borrowers with poor credit can still qualify for this type of financing. Many lenders consider minimum scores of 500 to 600 to be acceptable.
- This type of loan is frequently available to businesses that have been in operation for one year.
- Annual revenue requirements are also typically lower, hovering around $100,000 in many cases.
Short-term loans can range from $5,000 to around $250,000, and long-term loans can range from $5,000 to $500,000 or more. As a result, they are an excellent choice for business owners with more modest funding requirements.
This type of loan almost never requires collateral, making it ideal for entrepreneurs lacking specific assets. In many cases, decisions can be made within a few days, if not hours; some lenders even offer same-day decisions.
However, both short- and long-term online loans have drawbacks. Depending on your creditworthiness, the APRs on these loans can be prohibitively high—as much as 99% in extreme cases.
Best for: Companies that rely on long payment periods for invoices.
Invoice factoring is a popular but somewhat unconventional type of business loan.
Businesses that rely on invoices for payment frequently have to wait for long periods of time before receiving payment—up to 90 days in some cases. As a result, this can have a negative impact on a company’s operations, especially for smaller businesses that cannot afford to wait three months for outstanding invoices to be paid.
Companies that offer invoice factoring services purchase unpaid invoices owed to them, also known as purchasing accounts receivable. Rather than waiting for their clients to pay overdue invoices, businesses can sell them to an invoice-factoring company to get money faster, sometimes in as little as 24 hours.
In the end, invoice factoring is a trade-off. Invoice factoring allows businesses to avoid waiting months for payment, but it also means that some of the money owed is lost.
Invoice-factoring companies typically pay approximately 70% of an outstanding invoice for less creditworthy clients and up to 90% to 95% for billed customers with better credit. Another thing to consider is that factoring may not be suitable for businesses that rely on a high volume of smaller invoices, as the service fees may be prohibitively expensive.
#6. Apply for the loan
It’s time to apply after you’ve done your research and decided which loan you want.
Choose a lender
If you have a good credit score and small business finances, you can probably use a traditional lender. If you don’t meet those requirements, you might have to look online for less traditional loan options, such as a merchant cash advance.
Different lenders have different approval ratings. Biz2Credit’s Small Business Lending Index provides loan approval rates for each type of lender:
- Big banks: 13.5% (up from 11.5% in 2020)
- Small banks: 18.7% (up from 16.9% in 2020)
- Credit unions: 20.4% (up from 20.3% in 2020)
- Institutional lenders: 23.6% (up from 21.4% in 2020)
- Alternative lenders: 24.3% (up from 20.5% in 2020)
Make sure the financial institution you choose offers the loan you want and will repay it within the timeframe you prefer.
Get your documents ready
A lender will send you a list of the specific materials required to process your application. Each lender has slightly different requirements, but it’s usually something like this:
- Details about your company, such as your business plan, name, address, and tax ID.
- Personal and business financial statements, such as tax returns, bank statements, credit card bills, pay stubs, balance sheets, lease agreements, lists of business assets, and other related files.
- Information about business owners, such as personal information for anyone who owns more than 20% to 25% of a company.
Pro. tips: Prepare all of the required documents for your loan application using the SBA loan application checklist.
Submit your application
Each lender will have its own application process and instructions for submitting an application. Interviews are usually a part of the process. It could entail visiting a bank branch or scheduling a phone interview.
Follow the instructions provided by your lender. Learn how long it usually takes them to process your application during the interview so you know when to expect a response. Follow up with your lender as needed.
Before making a decision, weigh your options
Obtaining a business loan is a significant financial decision that should not be taken lightly. As the year 2020 demonstrated, significant economic disruptions can have a significant impact on everything from revenue forecasting to the financial viability of a business.
Only you can decide whether a business loan is right for your company. Before making any decisions, double-check to ensure that you’ve covered all of your bases:
- Before applying for a business loan, have as precise a dollar amount in mind as possible, and know exactly how you’ll invest that funding into your business.
- Even if a formal business plan is not required as part of a business loan application, consider creating one (if applicable) to identify any important points you may have overlooked, such as realistic revenue projections.
- When considering repayment terms, be realistic about how much your company can afford in terms of repayments, and identify any external factors that could jeopardize this.
- Consider speaking with a local financial adviser about your plans to learn more about different types of business financing.
4 Easy Steps to Getting a Small Business Loan Without Collateral
- Unsecured business loans are available from the Small Business Administration and online lenders.
- Having no collateral does not mean you will not be responsible for business debt on your own.
- Another option for obtaining business loans with no collateral requirements is peer-to-peer lending.
- For no-collateral business loans, lenders may charge higher fees or interest rates.
How to Get a Small Business Loan Without Collateral, here are 4 Easy Steps to follow:
1. Understand Your No-Collateral Business Loan Options
The first step in obtaining a business loan with no collateral is to understand the options available. A variety of lenders offer no-collateral loans, but loan terms and approval requirements can vary greatly.
SBA 7(a) Loan
Through its network of partner lenders, the Small Business Administration (SBA) guarantees loans for small-business owners. When you need working capital, there are several SBA loan programs to consider, with the 7(a) program being one of the most popular. The SBA 7(a) program does not require collateral for loans of up to $25,000, which is advantageous if you only need a small amount of money borrowed.
For loans greater than $350,000, the SBA requires lenders to collateralize loans to the greatest extent possible, up to the loan amount. If you don’t have enough business assets to fully secure the loan, lenders can use your personal real estate as collateral. Even if you don’t have any collateral, you can get a 7(a) loan if you meet the other requirements.
SBA Disaster Loans
In addition to 7(a) loans, the SBA provides disaster relief loans to businesses that have suffered losses due to natural disasters or economic downturns. For example, a company that has suffered losses as a result of a government mandate to close could apply for an economic injury loan.
Notice: The down payment for an SBA loan can range between 10% and 30%, depending on the loan and borrower.
Disaster loans under $25,000, like 7(a) loans, do not require collateral. If you borrow more than that amount, collateral is required, but the SBA will not deny you a loan solely because you lack collateral.
Alternative and Online Small Business Loans
Online and alternative lenders can provide a variety of loans with no collateral requirements to assist you in meeting the working-capital needs of your business. You may be able to obtain the following types of financing without having to provide collateral upfront:
- Term Loan
- Invoice Financing (also known as “accounts receivable financing”)
- Merchant Cash Advance
- Inventory Financing
- Equipment Financing
- Line of Credit
- Purchase Order Financing
However, there may be some type of security required with these types of small-business financing, but it isn’t cash or another physical asset you have to offer. For example, with invoice financing, you borrow money by leveraging your outstanding invoices.
You borrow against the value of your future credit card receipts with a merchant cash advance. In the case of equipment financing, the equipment you purchase or lease serves as collateral for the loan.
Another option for small-business financing that does not require collateral is peer-to-peer lending. Platforms for peer-to-peer lending connect investors with small-business owners in need of loans. Investors pool their funds to fund the loan, and owners repay it with interest, just like any other loan. These loans are unsecured, which means no collateral is required.
2. Examine Your Company’s Financials to See If You Qualify
Certain types of no-collateral small-business financing may be more difficult to obtain than others. For an SBA 7(a) loan, for example, you must have at least two years of operating history, meet the SBA’s definition of an eligible small business, and have the minimum credit score and revenues required by SBA lenders. Before applying for a 7(a) loan, you must also exhaust all other borrowing options, according to the SBA.
Online and alternative lenders, on the other hand, may have more flexible requirements. A lower credit score, for example, may not be an impediment to obtaining a merchant cash advance or invoice financing. Furthermore, startup loans from online or alternative lenders that only require six months of operating history may be easier to obtain.
The second step in obtaining a business loan with no collateral requirements is to assess your company’s overall financial position. This entails actions such as:
- Examining your personal and business credit ratings
- Update your balance sheet
- Developing critical financial documents such as a profit and loss statement and a cash flow statement
- Examining your company’s expenses and overall cash flow
The goal is twofold: to assess your creditworthiness for a loan and your ability to repay it. Failure to repay a loan can harm your credit score, making it more difficult to obtain future financing.
Warning: Some no-collateral loans, such as merchant cash advances or invoice financing, calculate the cost of borrowing using a factor rate rather than an interest rate. The factor rate can easily translate to a two- or three-digit effective APR depending on the financing terms and how quickly it is repaid.
3. Prepare for a Personal Guarantee or UCC Lien
While you may be able to obtain a small business loan without providing collateral, this does not mean the lender will not impose additional terms. You may be asked to sign a personal guarantee or agree to a Uniform Commercial Code (UCC) lien, for example.
A personal guarantee is exactly what it sounds like: an agreement that you will personally repay the debt incurred by your company. No-collateral loans and small-business credit cards frequently require personal guarantees. Because the lender has no collateral against which to attach if you fail to pay, the guarantee allows it to sue you personally to collect an unpaid debt.
A Uniform Commercial Code lien is distinct. This is essentially a blanket lien that allows a lender to seize any or all of your company’s assets if you default on a loan. Even if you didn’t put up any collateral to get the loan, a UCC lien would give the lender a backdoor option for attaching assets if you default.
4. Before Signing, Carefully Read the Terms
If you’ve applied for and been approved for a small-business loan without collateral, the next step is to understand the loan terms and conditions. Pay close attention to the interest rate, annual percentage rate (APR), payment schedule, and loan term when reviewing the loan agreement.
You must understand how long it will take to repay the loan and what your total cost of borrowing will be after interest and fees are deducted.
In terms of fees, check to see what you’re being charged. For example, there could be a loan origination fee or a prepayment penalty. You don’t want to pay a penalty if your cash flow allows you to pay off the loan early.
Finally, consider whether your borrowing agreement requires a personal guarantee or a UCC lien. While you may have good intentions to repay the loan, it’s critical to understand how these requirements may affect your business if you are unable to keep your end of the bargain for any reason.
Small Business Loan Frequently Asked Questions
Is it difficult to obtain a small business loan?
A small business loan can be difficult to obtain without a good personal credit score and proof of consistent revenue from your business. A lender faces a high risk of making a loan without these. If a bank considers an applicant’s profile to be less than solid, loan offers may require collateral or high-interest rates.
These requirements may put a strain on a company. If you believe your credit score or business revenues are insufficient, seeking financing through other means, such as money from friends and family or crowdsourcing, maybe a better option.
Do SBA Loans Require a Down Payment?
Yes, SBA loans require a down payment. The down payment will vary depending on the loan and borrower; however, a common down payment is 10%. In some cases, this amount can reach 30%.
Can SBA Loans Be Used for Personal Purposes?
Personal use of SBA loans is not permitted. The money can only be used for your company. This includes paying for business expenses, expanding your business, and paying your own salary. SBA loans cannot be used to pay off personal debts such as mortgage or credit card bills.
Obtaining a loan for your business can be difficult, especially if you are required to put collateral on the line, which increases your risk. The Small Business Administration (SBA) is a fantastic resource for business owners because it offers financing without the need for collateral.
Businesses can obtain loans without collateral outside of the SBA, but it is critical to understand the terms before signing the contract. Other strict terms or high-interest rates may apply to loans without collateral. Determine what parameters work best for you and the business when deciding on a loan.
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