Startups are young businesses, typically between two and five years old. Revenues can often be unpredictable for the first few years, so these companies tend to have limited funds. To continue growing, they’re likely to need one or more cash infusions.
The right type of startup business loan can help you launch your enterprise even if you don’t have much money on hand. This guide helps startup owners understand how to get a business loan with no money, what options are available, and what lenders are looking for.
Key Points
• Getting a business loan for a startup with no revenue is tough but may be possible with the right approach.
• Lenders assess your credit scores and history to determine your reliability.
• A solid business plan with clear financial projections can strengthen your loan application.
• Consider alternative funding options like grants, crowdfunding, and microloans.
• Be mindful of loan terms, fees, and the risks of personal guarantees.
Is It Possible for a Startup To Get a Business Loan With No Money?
It is certainly possible to get a startup business loan with no revenue and bad credit — but it may be difficult. That’s because lenders prefer borrowers with regular cash flow that can support monthly loan payments, and your business may not be at that stage yet.
As a result, you may be asked to provide collateral — an asset that has monetary value, such as equipment or real estate — that your lender could seize and sell if your business were to default on the loan.
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How Lenders Evaluate Risk and Viability
When lenders are considering your startup loan application, they are looking closely at how much risk they might be taking on. To confirm your startup’s eligibility and prospects, lenders will usually ask for a variety of financial statements, forecasts, tax returns, and other paperwork.
Overall, a lender generally compares your business’s financial health to an established set of standards. Those standards are often referred to as “the five Cs of credit”:
• Capacity (or cash flow) means having sufficient business income to pay back your company’s loan.
• Character refers to your general creditworthiness and history of loan repayment.
• Conditions are developments that may affect your ability to pay back your loans. They may be challenges to your specific enterprise or your business sector as a whole.
• Capital may be cash or assets; lenders like to see that you’re betting on your company with your own money.
• Collateral is (as noted above) a valuable asset that you put up as security for the loan. The asset can be sold to recapture some of the loan money if your business defaults.
Why Lenders Want You to Have Capital or Collateral
A startup applying for loans may not have much credit history to indicate how responsible its owners have been with past debt. That’s why many lenders pay particular attention to what your business can offer in the way of capital and collateral.
Capital is money you have on hand that could be used to pay back the loan. It could be in the form of liquid assets (such as cash or bonds) or illiquid assets (such as real estate, which you could sell to raise funds).
Collateral pledged as security for the loan helps the bank reduce its risk. If you were to default on your loan, the bank could seize and sell the collateral assets, reducing its loss. Capital can also serve as collateral.
The more collateral you have, the less risk you present to your lender and the easier you may find it to qualify for loans. You may also be offered lower interest rates that reduce your borrowing costs.
If you have collateral and a strong personal credit history, a no-doc small business loan from an alternative lender may be an option.
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Potential Ways to Obtain Funding With No Revenue
In addition to small business loans, there are several other ways you may be able to get funding.
Startup Grants
Your startup may qualify for small business grants. These are offered by governments, nonprofits, and sometimes even corporations to help new enterprises get off the ground. Unlike loans, grants do not need to be repaid. However, they sometimes have strict eligibility requirements. For example, they may be targeted at supporting certain demographics or industries, or they could be meant for specific projects that are named in funding opportunity announcements.
Crowdfunding
Crowdfunding is the online collection of small sums from the public to bankroll a new venture. Some crowdfunding platforms retain a small percentage of the donated money as their fee. Some may charge a payment processing fee on each contribution. As with grants, donation-based crowdfunding does not require that you pay the money back, though some projects do offer product samples to encourage potential backers.
Microloans
Microloans, as defined by the Small Business Administration (SBA), are loans of less than $50,000. Many microloan programs focus on startups, underserved communities, and entrepreneurs with limited credit history. Lenders tend to be nonprofit organizations backed by government entities such as the Community Development Financial Institutions Fund and the SBA.
SBA Loans
SBA loans, offered by traditional lenders, are partially guaranteed by the U.S. government. Businesses must abide by strict SBA guidelines in order to qualify for these loans. Each lender will have its own requirements as well. So the application process can be time-consuming.
At the same time, these loans offer many advantages. Because the agency’s backing reduces the lender’s risk, many SBA loans don’t require collateral. Other benefits for borrowers may include comparatively favorable interest rates, smaller down payments, and longer repayment schedules.
Personal Loans Used for Business
Personal loans are a type of installment loan that you repay over a fixed period. They are often unsecured, meaning they don’t require collateral, and you (not your small business) are personally liable for the debt.
These loans typically put few restrictions on what you can use the money for. Some personal loans allow you to use the funds for equipment financing and other business purposes, but others may forbid that. So it’s crucial to check the terms and conditions of your personal loan before making any work-related purchases with the money.
How To Strengthen Your Application
Strengthening your loan application can help you qualify for a loan and, possibly, secure favorable terms and lower interest rates. Here’s a look at some steps you can take.
Demonstrate Creditworthiness
To satisfy lenders, it’s important to maintain solid personal and business credit scores. The best way to do this is to always pay your bills on time. You may also want to keep your credit utilization low. If lenders see that you’re already using most of your existing credit, they may worry that you’re overcommitted.
Focus on Your Business Plan and Financial Projections
A strong business plan containing financial projections will help demonstrate your business’s viability, cash flow, and profitability. A business plan should include a description of your company and how it is managed, market analysis, descriptions of the products or services you sell, a marketing plan, and how much you expect the business to bring in over the next five years. These details all signal to lenders that your company will have enough money to pay back a proposed loan.
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Find a Co-Signer or Provide a Personal Guarantee
A personal guarantee or a co-signer may increase your chances of securing a loan. A co-signer is typically a person you know well, such as a close friend or family member, who has a good credit history. If you are unable to pay back the loan, the co-signer has the legal responsibility to repay it.
Important Considerations
Before you take out a startup loan, there are a few more fundamentals you may want to think about.
Personal Guarantee
Banks may consider it risky to lend money to your startup. They may ask that you make a personal guarantee on a loan before they approve it. This guarantee is a legal agreement that you are responsible for paying back the loan yourself if your business is unable to do so. That means your own assets could be at stake.
Interest Rates and Fees
Interest rates represent the price you pay a lender for access to borrowed money. We’ve mentioned interest rates several times already, because they’re important: They determine your total cost of borrowing. The lower your interest rate, the cheaper your loan will be. For instance, for a $100,000 loan, a 2% difference in interest rate could cost you an extra $5,000 over five years.
Fees can significantly increase the cost of borrowing. Read the fine print to know what fees you’ll have to pay. It’s also worth asking your lender which fees they may be able to waive.
Taking on Personal Debt or Risk
Think carefully before taking on personal debt for your business. Getting a loan may mean putting your personal assets, such as a home or your savings, at risk. Using more of your available credit to take on personal debt could lower your credit score, especially if you’re unable to pay the loan off promptly. And with a lower score, you’ll have more difficulty securing affordable credit in the future.
The Takeaway
Getting a startup business loan with little or no money can be a challenge. By exploring your lending options, strengthening your business plan, and demonstrating your vision to lenders, you can secure the support you need to grow your business.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Can I get a startup loan with bad credit and no money?
It is possible to get startup business loans with no revenue and bad credit, but it’s likely to be challenging. You may not qualify for the best terms or lowest interest rates. In that case, you may wish to explore loan alternatives, such as SBA microloans.
What kind of loan can I get to start a business from scratch?
If you’re starting a business from the ground up, you might consider traditional business loans, SBA loans, microloans, or a personal loan.
What’s the easiest type of loan to get for a new business?
Microloans, which generally top out at $50,000, may be the easiest to get, as they are often geared toward startups. Microloans are administered by community nonprofits with experience in lending; requirements are likely to vary.
Can I get a business loan without a business plan?
It might be possible to get a business loan without a business plan, but most traditional lenders — especially those offering SBA-backed loans — will require one. A business plan helps them assess your business’s viability and creditworthiness.
Are there government programs that help fund startups with no capital?
Yes, there are some government programs that help fund startups. In addition to the SBA’s loan programs, the agency runs the tech-friendly Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. Also, the Treasury Department provides almost $10 billion for the State Small Business Credit Initiative (SSBCI), which oversees capital access programs and technical assistance grants.
Photo credit: iStock/Miljan Živković
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