Due to a lack of collateral to receive a loan, many business ideas never get off the ground and remain only blueprints. Many entrepreneurs have given up on their business aspirations because the most prevalent means of obtaining funding are inaccessible to those with no assets.
However, there is a way to receive a startup business loan without putting up any collateral or using your assets as collateral.
A startup business loan application is more straightforward than a typical business loan, making them more accessible to newcomers. Some of these options for receiving the money your company needs without putting up any collateral don’t charge you anything extra or require you to pay interest.
If you want to apply for any financing, do your homework and compare different lenders to find the best financing option with the lowest interest rates.
Before we explore how to get a startup business loan without collateral, we should understand what business loans are.
What is a Business Loan
A business loan is when you borrow money from a lender to help facilitate the financing of your business operations. You and the lender will sign a contract that outlines the amount of money lent, the interest that will be paid back over time, and how the interest will be paid.
If you don’t have enough money to start your own business, you can ask for a loan. Startup company loans are a type of funding that helps entrepreneurs with no or limited financial records or credit histories.
Eligibility Criteria For A Startup Business Loan
Although different lenders have varying requirements for startup company loans, some aspects impact the qualifying criterion for these loans.
Let’s explore five eligibility criteria to qualify for a startup loan.
1. Personal credit scores and reports:
Lenders may look at your personal credit history and scores, so be sure they’re up to date and match the company’s minimal credit score requirements.
2. Business plan:
Have a well-defined business plan and sales strategy in place to show that your company is capable of repaying your debt.
3. Provision of a Guarantor:
Your guarantor assumes responsibility for paying the loan in your absence or if you cannot pay it back.
4. Banking Information:
If your new business loan is granted, the lender will need your bank account information to deposit the funds.
5. Provision of all government recognized credentials:
All essential financial information and copies of any licenses and registrations that allow you to conduct business in your state.
Five Steps To Get a Startup Business Loan
The procedure for obtaining a new business loan differs depending on the financial institution. You may face certain difficulties as a startup with a limited financial history and credit report.
The following are the processes to obtaining a startup business loan:
Step 1: Determine the kind of loan you require
The amount of money you can borrow and how you pay it back is determined by the type of loan and the lender. Check if you will qualify for a business loan based on your credit history if you are establishing a new firm.
Step 2: Check your credit score
Check all of your credit ratings before applying for a startup company loan. This can assist you in figuring out your chances of getting traditional funding.
Before applying for a startup loan, you can work on improving your credit score.
Step 3: Prepare your startup for due diligence.
Loan underwriting entails a thorough examination of a company’s creditworthiness. Your business plan, personal statement of account, and other financial documents are examined during this stage.
Step 4: Compare lenders to get the best deal:
It may be challenging to obtain a lower-cost company loan based just on personal credit history. Shopping around and comparing multiple lenders, on the other hand, will assist you in getting the best business loan with a more favorable interest rate.
Step 5: Apply for the business loan:
After you’ve decided on a lender, proceed through the application procedure and fill out all required information. You can apply online or visit a branch of the financial institution of your choice.
Six Sources To Get a Startup Business Financing without Collateral
Although most lenders will require some form of collateral, you can use other lending options to get a startup business loan without collateral. These options include:
1. SBA Microloans:
Startups can get $50000 in loans under the SBA (Small Business Administration) microloans program. The loan period is up to six years, and the interest rates range from 8% to 13%. And the rates vary depending on the lender.
Nonprofit lenders provide loans easily accessible to companies with limited financial records or credit histories.
2. Personal Loans For Business:
A personal loan may be more advantageous to a startup than a commercial loan. A personal loan application may be simpler than a company loan application. Some personal loan providers are opposed to loans being used for business reasons. Before you apply for it, establish with your lender that this is something you want to do.
3. Business Credit Cards:
Business credit cards, like personal credit cards, give you access to funds that you can spend on anything from office supplies and furniture to legal expenses, machinery, and significant expenditures. Compared to a traditional business loan, the application and approval process is way faster.
Startups are more likely to get authorized because it is solely based on personal credit history. Business cards can be used whenever needed, but cardholders must pay interest on any unpaid balances at the end of each month.
4. Friends And Family:
Obtaining a company loan can be tough with a limited financial record and credit history. Suppose you don’t qualify for a typical company loan or another type of loan. In that case, you might be able to borrow money from friends or family.
Before you accept to borrow the money:
- Be sure they’re okay with the idea of doing business with you.
- Review the business plan with the lender, talk about their roles in your company, and write down the loan terms.
- Ensure that the loan amount, repayment method, and interest rate are all agreed upon by both parties.
This is an option for business owners who did not qualify for typical business loans or who believe borrowing from relatives or friends is too personal. To begin, select an online fundraising platform, create an account, and determine the amount you wish to raise.
Following the crowdfunding campaign, people donate various amounts of money that will be available at the campaign’s conclusion. This type of financing does not require repayment of the funds and does not impose interest.
6. Small Business Grants:
Small business grants are funds granted to startups and other enterprises to help them get off the ground and flourish. Grants are available from various sources, including the state government, the federal government, and private businesses.
Unlike other sources of startup capital, small business grants do not require repayment and do not charge interest to business owners. This type of funding is always competitive, and the application process is always time-consuming and exhausting. But the benefits outweighs the hassle.
Starting a business may be laborious, time-consuming, and perhaps the most challenging component for entrepreneurs. It is possible to obtain a new business loan without collateral, but finding a lender to borrow from can be difficult.
When you cannot obtain a specific type of funding, examine various alternative financing possibilities.
Nonprofit lenders that offer SBA microloans programs, crowdfunding, or working with friends and family to raise funds may be the best options for your company.
Whatever choice you select, consider the loan amount, repayment plan, timeframe, and interest rate to see if it meets your needs.