Starting a small business is hard, and with all of the investment that needs to go into opening your business, it may seem impossible to gather the resources to get a collateral-backed loan. The good news is that there are loans available for your small business that don’t require collateral–you just need to know where to look.
Plus, there are ways that you can improve your ability to qualify for these loans. So here are some tips you can follow to get that small business loan without collateral, and some loan types to look for that don’t require collateral.
Ways to Improve Your Ability to Get a Small Business Loan
When you’re trying to get a small business loan without collateral, there are a lot of factors that enter into the lender’s decision making. And if you know what the factors are, you’ll be able to put yourself into a better position to get a better loan amount at a better rate. The key is to be aware of what these lenders are looking for.
Improving Your Credit Score
Improving your credit score is by far the best way you can improve your chances of getting a small business loan without collateral. So much of applying for a loan–any loan–depends on your credit, because your credit is both a record of how you’ve behaved without borrowed money in the past, and an estimate of how you’ll behave with borrowed money in the future.
When you have a good credit score, your odds of getting a good loan with good rates goes way up, and when you don’t have a good score, your odds drop through the floor.
But the good thing about credit scores is that there are clear ways to fix them. We know exactly what contributes to your FICO score, so it gives you a roadmap to repairing it.
The elements of your credit score are:
- payment history
- amount owed, credit mix
- length of credit history
- new credit
There are some things there that you can’t do much about: for example, the length of your credit history is fixed and you can’t make it any longer or shorter. But there are some definite things you can improve.
For starters, make sure that you’re paying your bills on time. This counts as the biggest portion of your score, so it’s the first step in repairing it. If you have a bad payment history, then start now to make it a good one. The sooner you can begin repairing your payment history, the sooner your score will improve.
Second, look at the amount you owe. Credit scores look at the ration of what you owe to what your credit limit is. If you’re using every bit of credit that you have–if all your loans are maxed out–then your amount owed isn’t going to look good.
Generally speaking, you want your ratio to be at or less than 35%, meaning that you want to only be using 35% of the credit you have available. (So, if you have a credit card with a $1000 credit limit, you want to be using less than $350.)
These two things are the best ways to improve your credit score, so start right now to make your payments on time and pay down your debts so you’re only using less than 35% of your available limit.
Do Your Paperwork
Getting a small business loan without collateral is harder than getting a standard collateralized loan, so you’ll need to do some paperwork first.
You need to write a business plan that you can present to your lender that identifies how your business is going to make money. The lender is essentially investing in your business, and they want to make sure that their investment is a good one, so they’re going to want to see that you’re a savvy businessperson with a firm plan to turn a profit.
Your business plan should include things like present and future predictions, growth strategy, financial statements, profit and loss statements, how you’re planning to use the loan money and so on.
You’re also going to want to do cash flow projections, so that you will know whether or not your business can afford to make your payments on your loan.
Small Business Loans that Don’t Need Collateral
Once you have a good credit score and all the necessary paperwork, you can start pursuing a loan that doesn’t require collateral. There are several types of non-collateralized loans available, but you have to know where to look and what they will require. Here are some of the possible loans you could apply for:
An SBA loan is a loan that is backed by the Small Business Administration. These loans are an obvious first place to start looking, because they’re designed specifically for this type of situation. An SBA loan generally requires no collateral. That’s not to say that all SBA loans are the same, or that they’re necessarily the best loan for you.
SBA loans are good loans, but they’re not quick and they’re not easy. There are a lot of hoops to jump through and a little bit of a wait (compared to other loans). These loans take more effort to apply for, require more paperwork, take longer to process, and have much stricter eligibility requirements than other types of loans.
For example, an SBA loan requires that not only does your business need good credit, but you personally need a good credit score, too. Also, a business must be at least 2 years old to qualify, so it’s not the place to look if you’re trying to launch a new venture. SBA loans also have some restrictions on your expenses, meaning that the money that you get can only be used in certain ways.
All of that said, even though it may take more work to get an SBA loan, it might definitely be worth it. Lenders like SBA loans, because they get some protection from the Small Business Administration, so lenders will be more willing to work with you and help you.
Online Term Loans
Online lenders provide both long-term and short-term loans, but there are some differences. Although you won’t get as good of a deal with this loan as you could get with an SBA loan, it may have fewer requirements and may be processed much faster.
Short-term loans are also available and have even easier requirements, but are more expensive and will require you to make much more frequent payments, even as often as weekly or even daily. They are, however, very easy to apply for.
Working Capital Advance
A working capital advance doesn’t require collateral, but it is different from most other loan types in that the lender is essentially buying your future assets. When you get a working capital advance, the lender is advancing you money that is paid back as a percentage of your sales, even deducting daily from your credit card receipts.
These advances are somewhat easy to apply for, but they are risky, as you are losing money off the top of every sale. Because of this, the contracts and fees associated with this are extensive.
Lines of Credit
A line of credit typically requires no collateral and functions similar to a credit card, except the money comes out of your checking account. There is a credit limit (usually between $10,000 and $250,000) and you are able to use that money at your discretion, just like you were paying for something with a check.
These loans can be easy to get and require very little time to be approved, assuming you meet certain credit and revenue requirements. They are more expensive than other types of loans, however.