In order to start a business, one need substantial resources. This isn’t just so you can launch but also in order for you to cover the day-to-day expenses until your business is self-sustainable. The problem with getting a loan early on lies in the fact that you’re most commonly required to offer a collateral in order to secure a loan.
You see, 9 out of 10 startups end up failing, some of which have a fairly decent business idea and a fairly well-developed business plan. This makes some banks and credit unions reluctant to approve one for a loan unless they can offer a collateral as a guarantee or have a stellar credit rating (which, most likely, won’t be the case in your scenario). Therefore, you need to find a source of collateral-free cash. Fortunately, this nowhere nearly as complex as it may sound. Here are some options that you’ll most likely have available.
1. What is a collateral and why does it matter?
The first thing we need to get out of the way is the definition of the word collateral. If you’ve already launched a business, you can use it, or at least a part of it, as a collateral. For some of the smaller figures, you can get a loan simply based on your average revenue, due to the fact that it will demonstrate to your lender that you actually can pay.
Apart from this, the most common collateral items home equity and vehicles, yet, as a small business, you can also use business inventory and equipment for this purpose. While this may seem somewhat counter-intuitive, you can also use the money that you are owed as a collateral. Most first-time entrepreneurs already know about the option of selling their invoices but using them as a collateral may still be an alien term. In other words, before you start looking for collateral-free cash sources, make sure that you check whether you have some valuable collateral that you’re unaware of.
2. Peer-to-peer loans
Perhaps the most efficient way of acquiring money as a new business without any collateral is through the option of peer-to-peer (P2P) loans. This simple concept rests on the idea that individuals, and not banks or credit unions, are the ones lending money to aspiring businesses and entrepreneurs.
The borrower is, therefore, receiving the funding they need by passing a much more lenient and less bureaucratic set of requirements, while the lender tends to make money in the long run. Aside from this, there’s also the altruistic side to this concept that comes from the knowledge that you’re lending not just resources but a helping hand to those who need it. How favourable loan you are able to get depends on the market and the business hub that you’re situated in. For instance, the trend of P2P lending in Australia is on a steady rise, while this option may be not-as-prominent in some less developed regions of the world.
By borrowing money through a P2P lending platform, you’ll be able to get your funds as soon as possible. Once you’re out of the woods, you can use this same platform, only this time as a lender. In this way you can A) give back to the community that has helped you through a tough time and B) generate some steady passive income. Both of which are great reasons to take this course of action.
3. Small business loans
One of the most popular types of collateral-free loans and it is probably the ticking vein of many aspiring startups in their early stage. Before we even start discussing it, in order to qualify for it, you need to fit within the category of a small business, which means having fewer than 500 employees and making less than $7 million in sales per year.
Once you have this out of the way, you need to understand what these loans are most commonly used for. First of all, they are used for purchasing equipment, buying or renovating a property, purchasing inventory and upgrading assets. Aside from this, they can also be used for payrolls, improving cash flow or debt refinancing. In other words, they are great for all that your small business may need in its infancy.
The last thing you need to know about small business loans is the fact that it’s an umbrella term used for several various forms of loan types. Some of them are term loans, lines of credit loans, SBA (small business administration) loans, online loans, business credit cards and alternative financing. All of these loans differ from one another in features and properties, which is why it’s vital that you do a proper research before deciding to apply.
4. Signature loans
When it comes to an unsecured loan, the signature loan-like scenario is most likely what people have in mind. The way in which this works is fairly simple, seeing as how a bank or a credit union offers you money based on a promise that you’ll pay. This is also why they’re sometimes referred to as good faith loans.
Now, before anyone jumps to a conclusion that this is an ideal course of action for first-time entrepreneurs, remember that this is one of those rare scenarios where the risk doesn’t work in your favour. In other words, the worst case scenario is not as bad, due to the fact that you don’t risk losing your private assets. The downside is that if everything runs smoothly, you’ll end up paying much higher monthly rates.
Once your company expands enough and acquires valuable collateral, you’ll get even more potential sources of cash to further grow your business. Add to this an effort to boost your company’s credit score and you’ll most likely never be in a similar financial crisis again. Nonetheless, just because you’re no longer a business in its infancy it doesn’t mean that these methods might suddenly become unavailable. Knowing all your options is the best way to ensure you’re always taking the right course of action.