If you are a small business owner, obtaining financing can appear like an impossible feat since credit score regulations and collateral requirements make it seem as if the odds are not in your favor. However, the good news is that a lack of collateral or having a less-than-ideal credit rating should not keep you from finding options. Below are things that you should know to get started.
Building an enterprise from the ground up can involve a lot of capital to buy equipment and stock inventory. Fortunately, start-ups have access to resources that provide loans through banks and private financing companies in order to help cover any needed expenses. From commercial leases to logistics and more, funding is generally available for those who know where to go to get what they need.
Don’t worry if you require a financing but lack the collateral to secure it. You can still qualify for an unsecured personal loan, provided that you meet certain qualifying criteria. So, what are they? Here are some requirements to help you out:
What’s Needed to Get a Collateral-Free Funding?
Excellent Credit Rating
Entrepreneurs with decent credit scores can secure a debt that does not require collateral to fund their businesses. This will help if an individual has an error-free credit report, no bounced checks and is always on time when making payments. You can see more about the definition of a credit score in this link here.
Sufficient Savings Account Balance
Applying for a debt? Just have a significant amount of savings on your account as well as regular cash flow to get a yes from the financiers. Know that they will look at the current bank balance and assess your capacity to pay so make sure to prove them that you’re creditworthy. Employment and salary stability are also taken into account as well as the different streams of income that a business owner receives each month so make this look good.
Income tax returns and profit and loss balance sheets might be a requirement since starting a small business venture might mean switching to an unstable income. Still, as mentioned, you can get the money you need in no time if you have a higher bank balance. Just submit your bank ID, proof of business registration, and other “know your customer” information so you can get a faster answer on your application.
Go with Private Financiers
Aside from government programs and private financiers, there are other alternatives where you can get funds. You can attract investors into your business, tap into your savings, or apply to institutions specializing in micro-financing. You can søk uten sikkerhet or search for unsecured debt online and see the current interest rates when you visit the link provided. Ensure you’re getting the best offers with low interest rates so it would be cheaper for you.
Are there other Options Available?
Get Small Business Administration Loans
Stay informed about what’s available in your area and get advice from reliable lenders to make sure you know exactly what you’re getting into. The Small Business Administration can act as a guarantor, allowing for loans of up to $25,000 for those who need funds to start their own clothing store or food cart business.
When you need more than $300,000, the institution will require you to present collateral along with your application. A real estate property is often enough for those who don’t have enough assets, but this is not recommended.
Help in the Event of Disasters
If you’re a business owner who has suffered from natural disasters, destruction of property, or other calamities that have caused the loss of your assets, consider applying for disaster relief debt. This kind of loan is designed to help small businesses survive during pandemics and economic downturns. There’s no collateral needed so long as you meet all the requirements and with this type of financial aid, even those in tough situations can keep their operations afloat.
Alternatives to consider include lines of credit, purchase order financing, equipment rental, merchant cash advance, invoice financing, and term loan if you’re still a start-up. These types don’t need any collateral, but you’re generally going to use your current invoices as a backup in case of a default.
Merchant cash advances will mean you’re loaning against the receipts of credit card transactions you might make in the future while equipment financing will involve a lease on the machinery you’re renting or buying as part of the debt agreement.
Are you running out of options? Give peer-to-peer lending a try! Borrowing from friends and families can be an option if they agree. At the same time, you can encourage investors to fund your start-up and return the money when the business becomes profitable. These unsecured types won’t require you to present any asset and it won’t be a problem at all.
Financial Reports are Very Important
You will find that getting qualified for a business loan can be difficult if you’re starting up. Even SBA types require entrepreneurs to be at least in operation for two years before they consider the application. You also need to meet the minimum credit scores and revenues before you’re allowed to submit your paperwork.
Fortunately, you can find alternatives with online lending companies that specialize in small businesses. Get started by knowing your current and business score from different credit bureaus. Update your financial status and balance sheet and check with an accountant to ensure that your cash flow and profit & loss statements are all correct.
Review your current cash flow and expenses so you’ll know the amount you can afford to borrow. When things are going well for your company, you will find it easier to obtain the financing you need to expand and be more successful, so it’s worth it to give this a shot.
Preparing for a Lien or a Personal Guarantee
Financiers generally ask entrepreneurs to meet many criteria and conditions before the business owners get the stamp of approval to get a business loan. A personal guarantee or a lien about the Uniform Commercial Code can work in these cases since they are essentially agreements that state that you will the amount borrowed when the business goes bankrupt.
Credit card companies require personal guarantees so they can be assured that someone will pay the debt even if the business is not doing well. This will be the last alternative that anyone should consider if they don’t want to put any collateral on the line.
Read the Terms and Conditions Carefully
Application for a business loan can be tricky, but you’ll feel like you were on cloud nine when you got the approval notice. However, before you sign on the dotted lines, you need to make sure that you understand the annual percentage rates, repayment due dates, terms, and other fees involved in the transaction.
See if prepayment penalties and origination fees are being charged with the transaction. Always check if you can apply with a different lender for the same amount and if they can give you a lower interest rate than what you initially received.
What to Expect with the Interest Rates?
In some cases, you might be facing an interest rate that’s between 5% to 37% when applying for an unsecured debt. This is the annual percentage rate average for both unsecured and secured debts, but the estimates will still depend on a business credit rating. Those with an excellent score ranging from 720 to 850 can expect an APR of 11.3%, while those with fair scores might get 22.3%. This comes from the lending marketplace of NerdWallet in 2022.
Common uses of Loan Funds
Small businesses can use the funds they obtain for whatever purpose they deem necessary. However, the most common use is simply to cover operational expenses, including rent, utilities, payroll, and inventory.
Taking out a loan can also be an advantageous option for entrepreneurs looking to invest in the necessary tools and equipment their business needs, from vehicles to furniture or computers. It is not only useful when it comes time to expand your operations, by opening another location or hiring extra staff, but during times of emergency too.
Whether you need assistance recouping losses due to natural disaster damage or addressing sudden drops in revenue, having access to finance will help ensure that your business continues running smoothly.