Securing working capital is the biggest challenge for startups and new businesses to support their initial growth. According to a 2019 Federal Reserve report, startups are the primary source of job creation in the U.S. but have to face financial challenges than bigger firms. Turning your business idea into a successful business requires easy access to capital, and it is possible with startup business loans.
Starting a new business doesn’t have to be backbreaking work. Having quick access to capital allows you to purchase needed equipment and inventory, hire workforce, upgrades, or simply cover daily expenses while you’re growing. There are different kinds of startup financing options with no collateral for new business owners.
Honestly, there are limited startup business loans with no collateral. Most business loans have a need for collateral to secure a loan. With that said, few startup business loan options with no collateral do exist.
Here is everything you need to know about startup business loan options, how to qualify for them, and the common documents required for startup business loans without collateral.
Small Business Startup Loans
Starting a business isn’t cheap and cheerful. It involves many startup costs and strategic planning rather than a desire to be your own boss. Fortunately, there are options available rather than tapping into your savings. Consider applying for startup business loans without collateral that caters specifically startups by providing smaller loan amounts. Here are your best 3-startup business loan options:
- Business Lines of Credit
Business lines of credit are the most convenient and affordable business financing options for small businesses. A line of credit offers flexible, revolving working capital to businesses whenever they need it.
Securing a business line of credit via traditional lenders requires you to put up collateral or personal guarantee. But with more and more alternative lenders stepping into the industry, more lending opportunities are becoming easily accessible to small business owners. Over the past few years, online lenders have begun providing unsecured business lines of credit without any collateral requirement.
If you’re a startup in desperate need of capital, consider this flexible and best startup business loan option without a collateral requirement for your new business.
With unsecured lines of credit, you don’t have to put up any collateral to secure funding. You’ll be given a credit line that you can tap into as and when needed and repay only what you borrowed—plus interest. After you’ve repaid the credit line in full, your line of credit will be available to you again for use.
On the contrary, secured lines of credit function similar to a secured business loan, where you’ve to provide collateral to be approved for them. Besides, secured and unsecured lines of credit work just the same.
Be cautious: with an unsecured business line of credit, you can secure less capital at a higher interest rate. Unsecured lines of credit are riskier than secured credit lines, which is why lenders offer less capital and charge high interest.
- Merchant Cash Advances
Merchant cash advances are another best startup business loan option without a collateral requirement. A merchant cash advance—also called a credit card receivable funding—offers a fast and easy source of financing to small business owners without collateral.
With a merchant cash advance, you get a lump sum payment in exchange for an agreed-upon percentage of your future credit/debit card sales that you can use to grow your startup.
No collateral requirement and acceptance of poor credit makes merchant cash advances the most suitable financing option for borrowers that don’t qualify for other business loans. However, tread carefully: Merchant cash advances are among the most costly funding option.
Factor rates are charge by lenders on merchant cash advance, usually from 1.18 to 1.48. You can calculate your total owed amount by multiplying that factor rate with your loan amount. After that calculation, convert factor rate into APR. and you’ll see your APRs going through the roof—reaching the triple digits in the worst cases.
While a merchant cash advance is a suitable startup financing option with no collateral, but it should be your ace in the hole to fund your startup.
- Business Credit Cards
Business credit cards are more preferred startup loan options than merchant cash advances. Actually, it should be your best funding option if you’re looking for startup business loans without a collateral requirement.
As a startup, you might be wondering where to apply and how to apply for financing especially with no collateral by your side. You also don’t know the types of costs attached to financing, so you don’t want to accept more debt than you can handle. Under such circumstances, securing a business credit card is a perfect choice.
With so many business credit cards available, getting 0% introductory APR business credit cards are an excellent way to support your startup business costs upfront. The repayment of 0% introductory APR business credit cards is over a set number of months interest-free. Just make sure, you repay off the balance before that introductory period expires and a variable APR sets in regulated by the market and your creditworthiness.
You should use a business credit card when you need flexible funding, quick access to cash, and little time in the business with solid personal credit and lack of collateral.
Overall, business credit cards provide affordable startup funding while you get your business functional. In addition, you can leverage your personal credit to access cash without putting up your assets. Business credit cards are a great way to help your business along until you have enough business history and cash flow to qualify for other financing opportunities.
Additional Startup Financing Options
As mentioned above, startup loan options with no collateral requirement are expensive lending opportunities for new business owners. So, before you accept an expensive loan because of a lack of collateral, consider these self-securing business loan options alternatively.
- Equipment Financing
If you need to purchase new equipment for your first project, consider applying for equipment financing. With equipment financing, you can finance up to 100% of your equipment purchases and repay in monthly installments. After the full finance payment, you own the equipment.
In terms of collateral requirements, the best thing about equipment financing is that the equipment itself serves as collateral for the loan. In case you default on the equipment loan, the lender will seize the equipment rather than your personal assets to recover the loss-making equipment financing an affordable startup funding option for business owners with poor credit.
- Invoice Financing
Invoice financing is another best-suited self-securing business loan option for startups. If you’re a service-based business expecting your customers to pay their invoices, invoice financing can help get you the cash against your outstanding invoices.
In invoice financing, you get a certain percentage of your outstanding invoices. The invoice financing company will keep the remaining percentage and charge fees for the time it takes your customers to pay off. After the customers paid in full, the lender will send you the reserve amount after deducting the fees.
In terms of collateral requirements, the invoices serve as collateral for the loan. If nothing recovered from the customers. Then the most collected amount is the initial invoice amount.
- Unsecured Business Loans
Either you don’t have collateral to secure a loan or don’t want to risk your personal assets, you can still get an unsecured business loan for your startup. With an unsecured business loan, you can get quick access to capital without collateral but at a high interest rate. Such loans place more risk on the lender in case you default on your loan, the lender doesn’t have anything to recoup the loss.
Preparing Yourself for Startup Business Loans
Before applying for startup business loans, start with checking your credit score—a measure of your creditworthiness. You can check your credit scores with top credit agencies. Working on improving your credit score will put you in a much better position—increasing your chances of approval for a startup business loan.
The next step is to use a holistic business approach and check your cash flow, business planning, monthly budgets for a loan, and necessary documentation before approaching a lender with a business loan application.
You also need to identify the type of financing you’d like and can afford. While gathering documents, assess what lenders will be looking for; the application for a line of credit will be different than that for a business credit card. Creating a monthly budget for loan payments will help you identify the financing product you’re interested in applying for.
The last step is to shop around and compare rates and terms of different lenders. Your local bank or credit union isn’t the only best option for you, but ensure to do your due diligence.
Documentation Requirement for Startup Business Loans
- Strategic business plan specifics strategies for growth and marketing
- Personal credit report
- Business projections with particulars on future cash flow and costs
- Business and Personal tax returns and supporting IRS documents
- State business licenses and registrations
- Financial statements
- Any legal contracts
The Bottom Line
Starting a business takes time, patience, experience, and hard work. While it can be challenging to find a lender, it’s not impossible to secure a startup business loan.
The lender will review different factors in underwriting your startup business loan. Shop around for lending opportunities and try to build creditworthiness alongside to become a solid candidate for borrowing. Alternative lenders offering lines of credit may be a suitable option for your business, or a cash advance may be worth a risk.
Be prepared and do due diligence while pursuing financing options. Most importantly, keep your enthusiasm for starting the business in mind. It can be hard to find a lender and approved for a startup business loan, but thorough research and the right motivation can help and get the job done.