How to Use No Collateral Loans to Start a Small Business
Regardless of the type of small business that you want to start, it may be possible for you to find no collateral loans that you can use to start your small business. You will need a certain amount of cash. If you have been unable to save enough to purchase the tools you will need, lease a building, prepare marketing materials or fund other activities, you may be thinking about securing a loan.
Unfortunately, it can be extremely difficult to secure a traditional business loan as a new company. According to Investopedia, traditional lenders are making very few loans to companies other than established businesses with good credit — and in many cases, even the most creditworthy companies must provide collateral. During 2015, fewer than 22 percent of the loan applications submitted to traditional lenders by small businesses were approved.
What to Do if You Plan to Use No Collateral Loans to Fund Your Startup
No collateral loans are also known as unsecured loans. This means that they are not secured by a tangible asset — collateral — that the lender can claim if the borrower fails to repay the loan. Mortgages and auto loans are examples of secured loans; if you fail to make your mortgage payments, the lender can foreclose on your property, and if you fail to make your car payments, the lender can repossess your vehicle.
Without collateral, the lender faces a higher level of risk, so no collateral loans tend to carry higher interest rates than secured loans. In addition, most lenders want to have some type of recourse in case the loan is not repaid, so they will usually structure these types of loans as personal loans, meaning that you are personally responsible for repaying the loan.
If you feel that an unsecured loan might be your best option, there are a few things that you should do before you contact a lender.
• Determine precisely how much money you need. You never want to borrow more than is necessary, but if you cannot obtain a loan for enough to handle what you need, you may be setting your business up for failure.
• Have a realistic business plan. You need to have an accurate estimate of what your expenses will be as well as the revenue that your business will generate. New business owners tend to be overly optimistic about revenue and severely underestimate expenses.
• Know exactly how the proceeds from the loan will be spent. Do you need to purchase a particular piece of equipment? Will the funds go toward deposits to set up utilities for your new space? Are you planning to invest the proceeds in inventory? Without a spending plan, you could find that the money is gone, but you have nothing to show for it.
• Evaluate your personal finances. Even if your business does not earn a penny for the entire term of the loan, will you be able to make the loan payments as well as pay your personal expenses? If not, borrowing money to start a business might not be a good idea until you improve your financial security.
• Seek out lenders who offer cash loans online. By requesting a loan online, you can investigate interest rates, requirements and repayment plans easily. When you are ready, you can submit your request from any location and at any time.
• Obtain a copy of your personal credit report from at least one of the three major bureaus. You are allowed a free copy annually from each bureau. Your lender may not perform a traditional credit check, but you need to know that there are no mistakes on the report that could be viewed as unfavorable — just in case.
• Consider your options. An article posted on Chron.com suggests that you consider finding a partner who can bring cash into the business or borrowing from friends and relatives. If you have a credit card in your name, you could also use it as a source of funds, especially if the amount you need is relatively small.
Explore All of Your Options Before Choosing Cash Loans Online
Although an unsecured loan from a lender offering cash loans online can be an excellent option, it is always better to avoid debt when starting a business.
• Investigate grants for which you might quality. For example, military veterans may qualify for business grants, and there are a variety of business grants for minorities and women. These grants can be difficult to obtain and are seldom fast, but if you have the time and energy to pursue them, the effort could be worthwhile since you will normally not be required to repay them.
• Consider postponing the launch of your business until you have accumulated sufficient savings. Many successful entrepreneurs have earned the money to start a business by taking a part-time job on weekends or at night, trimming the waste from their personal budget or selling possessions that they no longer need or want.
• Instead of asking relatives or friends to loan you the money, consider asking them to invest in your business. You will need to determine the percentage of the profits that you can offer each person, but you want to make sure that you retain at least 51 percent of the business. However, equity financing can be tricky, so it would be best to consult an attorney before proceeding.
• Another alternative might be crowdfunding. According to Legalzoom.com, current laws allow you to raise up to $1 million annually through crowdfunding. However, considering that less than 41 percent of the campaigns on Kickstarter actually get funded, you should understand that you have no guarantee that you will be able to raise the cash you need.
If You Choose to Borrow, Borrow Responsibly
Finding banks who offer no collateral loans for businesses has become very difficult, but lenders offering cash loans online have become increasingly common. By 2020, Morgan Stanley estimates that online lenders will provide approximately 16 percent of all loans to small businesses. These lenders are especially useful if you need the cash quickly or have personal credit that is impaired.
Online lenders offer a variety of personal loans that you could use to fund your fledgling business. Typically, your best option would be a personal installment loan. Installment loans allow you to make monthly payments over several months, reducing the strain on your budget and increasing the likelihood that you will be able to make every payment on time. If you choose this option and encounter a problem with making a payment, contact your lender. Most lenders will work with you if you communicate with them.