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Borrowing money is a sensitive matter, especially for banks that will always look for a guarantee that borrowers will repay them, plus interest. Without that guarantee, banks have little reason to grant a loan if they consider a borrower to be a high risk. Unfortunately, “high risk” is a stigma attached to startups; it doesn’t help that the statistics seem to agree with it, too:
- Data from the Bureau of Labor shows that 20 percent of startups fail within their first two years of business.
- Startup Genome’s latest research revealed that four out of 10 startups have a capital runway of only three months or less.
Here’s the rub: most startups have little capital and no valuable asset to put up as collateral, and yet, they are the ones most in need of financing.
The non-traditional route: Collateral-free loans for startups.
If you own a startup that needs an influx of cash, but you don’t have anything of value to offer as collateral, you can forget asking for a loan at a bank.
Your best bet would be to apply at private lending institutions that provide startup business loans with no collateral. There might be compromises, like interest rates that are slightly higher than bank loans. But the payoff is getting the cash you need to keep the business running now so you can implement those plans to increase your revenues.
What are your options for collateral-free loans for startup businesses? Take your pick from the following:
Working capital loans.
These collateral-free loans are meant to sustain a business’s daily operations by providing much-needed cash flow that owners can use to pay off working capital costs and operating expenses. Examples of these are inventory acquisitions, taxes, payroll, overhead, and accounts payables.
Financing for equipment leasing.
Leasing agreements don’t need collateral. This is a sound alternative to financing for buying brand-new equipment: the loan and interest are much more affordable and the terms more flexible. There will be less pressure for the startup business to perform exceptionally high on year one because there are no absurdly high fixed dues to pay each month.
Merchant cash advance.
You may qualify for a merchant cash advance if a large chunk of your revenues come from credit card sales. This loan is essentially an advance on the income you expect to get. There’s no need to repay or offer anything for collateral, too, because the lender will automatically deduct the payments (a specified percentage) from your future earnings.
What if your startup hasn’t been in business long enough to have substantial historical data on monthly revenues? You may not qualify for a merchant cash advance, but you can certainly apply for a working capital loan. Moreover, if your need is specific to equipment upgrades, you can take the strategic route and seek financing for equipment leasing instead of the two other options.
Enjoy collateral-free loans from Probably Funding.
All of the loans discussed above are available at Probably Funding. We specialize in affordable financing solutions for small businesses and startups. Choose from the options above if you have no assets for collateral. If you have further questions, contact us through phone or email.
Disclaimer.
This Probably Funding blog post is purely educational and features general information and opinions. Nothing contained herein is intended to constitute advice or recommendations and should not be treated as such.