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How To Get a Startup Business Loan Without Collateral

How To Get a Startup Business Loan Without Collateral | BITC Blog

Startup business opportunities are flourishing in 2022. With the economy back on track, now is an excellent time to enter your dream business venture. However, the most significant limiting factor for startups seeking business is access to suitable business loans. Further, the business loans available require collateral, but it’s nearly impossible to establish collateral within the first two years of business.

The solution for startups is business loans without collateral. While banks will shy away from financing small business startups, Online loan lenders like BitX Funding have you covered. While you may not get a traditional business loan, many funding options are available to get your startup up and running.

If you’re a startup business owner without collateral seeking funding, read on to learn more about collateralized loans and which funding options are available if you’re a new business without collateral.

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What is Collateral When Taking Out Loans?

Any time you apply for a loan, a lending institution runs a credit check on you (or your small business if it’s a business loan). They look at your credit score, debt balance, income, possible assets, and your time in business if applying for a business loan. Once a lender assesses your credit, they determine the risk they take by offering you a loan. To balance out this risk, lenders apply terms to the loan.

Terms can include:

  • Loan Amount
  • Loan Length
  • Annual Percentage Rate (APR)
  • Payment Frequency
  • Collateral

While all these terms are flexible and can change from loan to loan, the inclusion of collateral with a loan significantly impacts other terms. Collateral offers a default for the loan if you can’t pay it back and provides less risk to the lender. Lack of collateral poses more risk and thus increases the severity of other terms, such as the loan amount and interest rate. In lending terms, a loan with collateral is secured, while no collateral indicates an unsecured loan.

Secured Loans

Secured loans are any that require collateral as a condition of the loan. This collateral acts as a default for the loan if the borrower cannot pay it back. By offering collateral against the loan, the borrower signals much greater trust to the lender. Because of this trust, secured loans offer much better terms for the borrower. The lender takes on less risk and can offer a more favorable loan.

However, most startups don’t have sufficient collateral or haven’t had the time in business to generate it. Fortunately, unsecured loans are a suitable lending option.

Unsecured Loans

Loans without collateral are known as unsecured loans. The most common example of an unsecured loan is a personal credit card. This line of credit doesn’t require collateral, and terms are based primarily on your credit score. Unsecured loans offer a flexible option for lenders because they have much more freedom to lend, especially with smaller loan amounts. If lenders required collateral on every lending option they provided, it would significantly bottleneck the entire loan-lending process.

Lenders will provide more stringent terms because of the greater risk associated with unsecured loans. However, if you’re a savvy business owner and know your startup lending options, you can get suitable loans without collateral for your small business.

What Startup Business Loans Are Available Without Collateral?

While a bank may inform you there aren’t suitable loan options for your startup, what they’re telling you is that they aren’t willing to take on the risk of lending funds to your startup. In truth, several startup lending options are available for your small business. These options don’t have as favorable terms as larger business loans. However, they offer freedom and flexibility for an up-and-coming small business.

The most robust options for a business without a credit history or time in business are those that use the business owner’s credit to apply for smaller personal loans or credit cards. Despite the terms and loan amount on personal terms (or credit cards), they provide reliable liquidity when you need it most. Additional options, such as invoice financing, offer solid returns for select businesses.

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Personal Term Loans for Business

  • ~12% APR
  • 5-7 Year Terms
  • No Pre-payment Penalty
  • Requires 700+ Credit Score
  • Requires 50k+ in Personal Income

Personal term loans are a premium startup loan option if you have a solid personal credit score and history. The way it works is that the business owner applies for one or more personal term loans and uses those funds for their business. Not only can you apply for a large personal loan, but there is also the option of stacking several personal loans to get the funds you require.

Personal term loans require no collateral, are processed very quickly and offer excellent flexibility. In fact, you can use funds from your personal loans towards any business expense, including building your business credit score so you can apply for more suitable loans in the future. Applying for personal term loans is the best option for business owners with magnificent credit scores who find it challenging to secure larger business loans.

Credit Card Stacking

  • Down to 0% Interest Rates
  • Ongoing Terms
  • Fast Processing Times
  • Requires 600+ Credit Score

Another great way to leverage your personal credit score towards your business is through credit card stacking. This process involves taking out multiple credit cards (optimally at 0% interest) and using the collective funds for business expenses. Credit card stacking is another lending workaround, similar to personal term loans, that gives you a working line of credit for your business.

Business owners can apply for 0% credit cards with a lower credit score than personal term loans, which makes it a viable option for business owners who can’t secure other lending options. Keep in mind that each credit card you receive temporarily lowers your credit score. Additionally, you will be responsible for keeping track of and paying off each line of credit you open. However, responsible business owners who use their credit cards appropriately can build their credit higher than before opening each credit card.

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Invoice Financing

  • 1-5% Factor Fee
  • Fast Processing Times
  • Requires 600+ Credit Score

For businesses with multiple outstanding invoices, invoice financing provides a lending solution that can give you fast and flexible funds. With invoice financing, you use your invoices as collateral to receive a percentage of the invoice up front, with the remainder of the funds becoming available when the invoice is paid. When you sell the invoice to the lending institution, they establish a percentage fee that they remit when paying you the second portion of the invoice value.

For example, you sell an outstanding invoice to a lender for 80% of its value. The lender now collects the entirety of the invoice from the party who owes money. When the lender is paid the total value of the invoice, you receive an additional 10-15% of the invoice value minus 5-10% of the lender’s pre-established cut. The percentage of the invoice that’s factored in and the amount the lender keeps as payment depend on your credit score and time in business.

Get Approved for No-Collateral Startup Loans Today With BitX Funding

With the economy back on track, now is an excellent time for startups to flourish. However, a significant hurdle for startups seeking funding is the availability of loans without collateral.

Collateral is any asset used to mitigate risk to the lender when they provide financing for an individual or business. New businesses rarely have significant investments to offer, making unsecured loans a highly desirable option for small startup businesses.

Fortunately, several no-collateral options are available for small business startups, including personal term loans and credit card stacking. If you’re a small business owner who needs unsecured loans to boost their business, BitX Funding has you covered.

For more information on small business loans of all kinds, contact BitX Funding by phone, email, or fill out the form below.

 

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