Securing funding is one of the big challenges of starting a business. Cash flow issues, stiff market competition, economic uncertainty, lack of planning, and poor credit history are some financial problems you may have when running a business. Getting initial capital may also be a challenge in the early stages.
Learning how to get a business loan without money may offer a solution. Read this Remitly guide to discover how to access business loans without money.
Is it possible to get a business loan without money?
Yes, getting a business loan without money is possible. However, it’s not as easy as traditional bank financing, which requires strong credit scores, personal guarantees, stable cash flow, and successful operations for two or more years.
Accessing financing with no credit history and no cash flow may require you to think creatively. Before applying, understand the common misconceptions about business loans so you can make an informed decision.
Common misconceptions about business loans
- Banks are the only source of money. Small businesses in the US can source funds in other ways. Alternative business financing options include crowdfunding, microloans, business credit cards, grants, competitions, personal credit, and community lenders.
- Only businesses in financial trouble need loans. Your business doesn’t have to be drowning in debt to seek financial assistance. You may have enough money personally, but you may need credit to start a business. Additionally, businesses will take out loans for reasons other than cash constraints. Loans support growth, expansion, marketing, buying new equipment, acquiring assets, and improving cash flow, without compromising your personal lifestyle.
- Loans are for large cash needs. You can apply for a loan even for small financial needs. It could be to settle a debt, buy new equipment, or fund a marketing campaign.
- Loans are expensive and difficult to obtain. Fintech has enabled quick loan access, even without visiting a bank and filling out extensive forms. Download mobile applications to access quick business loans from online lenders.
- Only your credit score matters. Credit scores play a role in determining your creditworthiness. However, this is not the only factor lenders consider before loaning money. Support your application with details, including industry, updates on other current loans, commercial leases, and your business plan.
- All businesses are eligible for loans. This is partly true, depending on the lender. For example, friends and family will support you when they believe in your dream. However, institutions and banks have a list of eligible businesses, which doesn’t include the adult industry or gambling businesses.
Exploring financing options for aspiring entrepreneurs
So, how do you access money when your business lacks collateral or cash flow?
Alternative financing options for small business loans
Microloans: Small businesses can access microloans through the US government’s Small Business Administration (SBA). Microloans are small loans capped at $50,000 that offer working capital, expand inventory, engage suppliers, and buy equipment. The SBA works with microlenders and doesn’t directly disburse the money. To apply for a microloan, peruse the list of SBA-approved microlenders.
Business credit cards: These credit cards are designed for entrepreneurs to help build a credit profile for their businesses. You can access them without an employer identification number (EIN), which is a unique number that the Internal Revenue Service (IRS) uses to identify businesses in the US.
Crowdfunding: Businesses can also raise capital through crowdfunding platforms that allow entrepreneurs to collect money from many investors to start a business. The Securities and Exchange Commission (SEC) regulates crowdfunding activities in the US. So, ensure that you work with platforms that are SEC-compliant.
You can also consider SBA loans and grants as alternative financing.
How SBA loans and grants can assist your small business
Typically, you’d need a personal guarantee to access traditional business loans. Fortunately, the US government partly guarantees small business loans via the SBA to make it easier for businesses to access loans by reducing lenders’ risk.
You can get a loan for as little as $500 to support your business. The SBA caps the loan at $5.5 million.
These loans are tailored for businesses officially registered and operating in the United States. You must also prove that you’ve exhausted funding options from non-government sources to be eligible for SBA loans.
Applicants can access several types of SBA loans:
- SBA 7(a) to start a business with working capital, or grow a business by buying machinery and equipment, or investing in assets.
- SBA 504 loans help small businesses buy and improve fixed assets like property.
- SBA Express loans are a streamlined SBA 7(a) loan and are a great choice for immediate needs like paying suppliers.
- SBA Export Working Capital and Export Express loans support your dreams of going global by providing finance for export activities.
The SBA also offers grants, which are funds that you won’t have to pay back. However, not all businesses are eligible for SBA grants. This product is designed for research organizations, non-profits, community organizations, and businesses supporting research and development to help promote entrepreneurship and stimulate economic growth. SBA grants won’t help you start or grow your business.
Business loan terms and conditions for traditional bank borrowing: key factors lenders consider
Banks consider other factors when looking at
- Good business credit score. Anything above 76 for Experian and Equifax, 160 for FICO SBSS, and 80 for Dun and Bradstreet is considered a good business credit score.
- Impressive cash flow. Some lenders have a cap on the minimum annual revenue they’ll consider. Bank of America, for instance, requires businesses to have a minimum of $250,000 in annual revenue to access secured business loans.
- Debt Service Coverage Ratio (DSCR). The DSCR compares your debt to current revenue. Lenders prefer ratios above one. For example, if your annual revenue is $100,000 and you’ve got $20,000 debt repayments, your DSCR will be 5:1, which is excellent. However, if the reverse is true, your DSCR will be 0:2, possibly causing the bank to deny you the loan.
- Operational years. Bank of America, for instance, will only lend money for commercial real estate, equipment purchases, and secured business loans if you’ve been operational for two years or more.
- A detailed business plan. This is necessary for the bank to assess your business’s sustainability and determine your ability to pay based on future plans and projections.
- Collateral. The lender can use collateral to recover the money in case you default. This could be a business asset like property, land, or equipment. A personal guarantee may serve as an alternative.
These requirements are ideal and easy to meet if you’ve been running a successful venture for years. Unfortunately, these conditions aren’t feasible for most startups. So, no-money-down loan options are good alternatives.
No-money-down loan strategies
Consider taking out a no-money-down loan if the above business financing options aren’t feasible. Usually, banks require up to 20% down payment for business loans to reduce risk. In that case, you’ll need to give the bank $20,000 to access a $100,000 commercial loan.
How does a loan with no money down work?
No-money-down strategies sometimes sound too good to be true because people assume they can access free money. That’s not it.
Although the lender may ask for a down payment or collateral, they’ll find other ways to reduce financial risk when they lend you money.
- They’ll lend via the SBA, so the government will guarantee your loan.
- They’ll ask for a small down payment if you’re purchasing equipment or machinery that depreciates fast.
- They’ll offer term loans, stretching up to five years, allowing you to make small and comfortable repayments. These loans can be unsecured, requiring no collateral or guarantees, or secured, where you may also pledge collateral.
- They’ll opt for invoice financing, using unpaid invoices as collateral.
- You’ll be offered an unsecured line of credit that allows you to access money without making a new loan application.
How lenders determine your repayment capabilities
These lenders will also assess your ability to repay the loan by looking at your:
- Tax returns
- Assets
- Current and past loans
- Savings
- Personal collateral
- Debts
Pros and cons of business loans with no upfront capital
No-money-down alternatives come with potential benefits and drawbacks that you need to consider before taking them.
Benefits of securing a no-money-down business loan
- Easy and quick to qualify
- Allow you to start a business without using personal funds or collateral
- Support business growth without waiting for cash flow
Potential risks and challenges of a no-money-down business loan
- High interest rates
- Higher loan processing fees
- Short-repayment period
- Lower loan limits, limiting how much you can grow
Tips for improving loan eligibility without initial capital
Getting a business loan without money is possible, but it has challenges. It’s best to work toward improving loan eligibility to access better quality loans with higher limits.
Build a solid business plan
A good business plan that is scalable and ensures sustainable growth will make it easier to get accepted for a loan. In doing so, use high-quality financial forecasting tools to generate accurate financial projections and identify gaps and challenges.
Explore partnerships and cosigner opportunities
You can also enhance your loan eligibility without initial capital by exploring partnerships with investors or venture capitalists. Finding cosigner opportunities can also help raise initial capital before the business establishes a credit history. A cosigner could be a family member, friend, business partner, or another company or organization.
FAQs
Is it possible to get a business loan with no money?
Yes, it’s possible. If you don’t have strong credit scores, personal guarantees, stable cash flow, or a successful operation for two or more years, you can opt for a no-money-down loan or SBA loans and grants. Find out if you’re eligible before applying.
Can I use my EIN to get a loan?
Yes. You can apply for business credit cards with or without an employer identification number (EIN). An EIN is a unique number that the Internal Revenue Service (IRS) uses to identify businesses in the US.
Can a startup LLC get a loan?
All business entities一sole proprietorships, partnerships, limited liability companies (LLCs), and corporations—can get a loan in the US.
What is the minimum credit score for a business loan?
There isn’t a minimum credit score for business loans. However, anything above 76 for Experian and Equifax, 160 for FICO SBSS, and 80 for Dun and Bradstreet are considered good scores.
Can I start a business with no money?
Yes, you can. Access initial capital via SBA loans and grants, online lenders, business credit cards, crowdfunding, and microloans.
What is the quickest way to get a business loan?
Online lenders who have simplified the loan application process or a no-money-down business loan.
Who gives the best small business loans?
It depends on your circumstances, such as how quickly you need the money, the terms, interest rates, repayment period, and whether the loan is secured or unsecured.