How to Get a Startup Business Loan With No Money

Can you get a startup business loan without any cash saved up or revenue coming in?

While the short answer is yes, getting a startup business loan of this type can be incredibly challenging and lead to you paying more in the long run. 

However, it’s not uncommon to be in this situation. You won’t be the first entrepreneur who has already spent their savings and other initial investments to get started and is still pre-revenue. 

If you have no additional savings to invest or revenue coming in from early sales and believe you need a business loan, here’s what you need to know.

How to get a business loan for a startup without revenue

Because your business is not generating revenue (yet), you’re starting off as a riskier investment. So, your goal when pursuing a startup business loan is to minimize risk in the eyes of the lender.

1. Understand lender requirements

Your goal with this step is to:

• Understand the eligibility requirements for most business startup loans.
• Immediately disqualify specific lenders that require revenue.

While requirements will vary from lender to lender, most will expect the following:

• Business Plan: An excellent business plan convinces the lender that you know what you’re doing and where you’re going. This document should articulate your business concept, target market, and competitive advantage, along with a clear roadmap of your financial projections. 
• Personal Credit History: If your business is new and lacks a financial track record, lenders often consider the business owner’s personal credit history. Ensure your personal finances are in order and free from any red flags to demonstrate you are a responsible borrower.
• Collateral: Even if you have no money, personal or business assets like property, equipment, or inventory can often be used as collateral.
• Cash Flow and Income: Lenders will want to see financial statements and projections demonstrating your business’s profitability and cash flow. If your business isn’t up and running yet, they’ll still want to see forecasts, and if you have another job, they will likely request your personal income.
• Business Experience and the Strength of the Idea: Industry experience reassures lenders that you possess the necessary knowledge and skills to be successful. Similarly, if your idea is particularly innovative or you have strong proof of customer interest—lenders may view it as a far safer investment.
• Legal Aspects: Ensure all your legal ducks are in a row. This includes business licenses, registrations, contracts, leases, and other legal documents relevant to your business.

Remember, take the time to thoroughly review a loan application from top to bottom before you start filling it out. Don’t submit an application if you don’t believe you have all the required documentation.

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2. Write or update your business plan

You need to treat your business plan as your best shot at convincing lenders that you’re worth funding. In fact, a study conducted by the University of Oregon found that businesses with a plan are far more likely to get funding than those without.

That’s because, at a minimum, it proves that you’ve put in the work and are serious about your business. At best, the opportunity, plan to execute, and financial expectations in your business plan convince lenders you’re worth the investment despite your lack of cash.

To take it further, you should also explain how you intend to use the investment: How it amplifies the opportunity, how it influences your execution, and how it impacts revenue and repayment. 

This will apply when you’re starting from scratch or revising a previous plan.

3. Determine how much you need and if you will be able to repay

You need to know how much money you need to borrow. 

One of the biggest mistakes startups make is not borrowing enough money. Not only will you need money to open the doors of your business, you’ll also need to have enough cash on hand to cover expenses for the first few months as sales ramp up.

The best way to determine how much money you should borrow is to create a financial forecast. Your forecast should include: 

• An expense budget for everything it will take to launch your business
• An expense forecast for the first several months to get up and running. 

For most businesses, initial sales won’t cover all your expenses. You’ll need enough cash in the bank to cover the initial shortfall until you reach positive cash flow and profitability.

4. Decide on collateral and if you’ll bring on a co-signer

You need to carefully consider your personal finances. 

Can you afford to take on a business loan? Can you make monthly payments? If you have other financial obligations, can you cover them if your business doesn’t generate profits as quickly as projected? 

Because you lack cash and revenue, you’ll likely be required to offer some sort of collateral. This can include property (like your house), investments, and even a promise for portions of future revenue.

If you still lack enough collateral to secure a loan, then you may need to consider bringing on another guarantor to co-sign. This individual will take on the loan with you and be on the hook to cover payments if you fail to do so.

Remember that this person is likely a family member or friend willing to support you. Mixing business with family can be complicated, and you need to weigh the risks before having someone tie up their finances in your business. 

If you go this route, it’s crucial that you get a legal agreement in place with your co-signer so you have a clear picture of what happens if things don’t go as planned.  

5. Demonstrate your ability to repay the loan

Lenders will also want to see that you have a solid plan for repaying your loan. Your financial forecast will be a useful tool for this.

Including your loan payments in your forecast will give you an accurate picture of the sales that will be required to pay your loan payments. The forecast will also help reassure lenders that you have a realistic repayment plan. 

6. Understand the pros and cons of getting this type of loan

Just as a coin has two sides, so does taking a business loan for your startup business. You must be mindful of the risks (and possible benefits) involved when borrowing money. 

Cons

• If the business doesn’t go as planned, you’ll still be on the hook to repay the loan. If you pledged any assets as collateral, you could lose them.
• Because you are pre-revenue and seen as a riskier investment, you will likely have worse loan terms and pay higher interest rates and additional fees.

Pros

• The right amount of money can be enough to get your business to a revenue-generating state.
• A business loan is one of the least risky forms of financing that allows you to keep control of your business.
• Getting a loan now can help you build business credit and lead to better terms in the future.

Types of business loans for startups with no revenue

Not all loan offerings are created equal, so it’s important to explore various startup loan options to see what might be the right fit for you and your business. 

• Microloans: These are small loans, often less than $50,000, provided by nonprofit organizations, the SBA, and specialized lenders.
• Equipment Financing: Instead of buying equipment outright, consider equipment financing to spread the cost over a longer period.
• Business Credit Cards: A good way to handle short-term expenses and possibly earn rewards that you can use for other business needs, such as hotel stays and travel.
• SBA Loans: While not directly lending, the Small Business Administration guarantees loans made by banks, reducing the lender’s risk and making it more likely for startups to get approved.
• Accounts Receivable Financing (factoring): If you have initial orders or customer contracts and your customers won’t pay until you deliver their product, you can get a loan based on these orders.

Alternative funding options for pre-revenue businesses

Traditional business loans aren’t the only way to raise money for your startup business. Here are a few alternatives you can consider:

• Friends and family: Some of the world’s most famous and successful businesses started with funding from loved ones. If you go this path, be sure you treat it like you’re getting a loan and make it an official business relationship. 
• Crowdfunding: Crowdfunding platforms like Kickstarter and Indiegogo allow you to raise smaller amounts from a large number of people. Crowdfunding is typically a form of pre-order for your product, so you’ll be on the hook to deliver your product to early supporters.
• Investment: Raising capital through investment means that you’re selling a piece of your business (equity) to angel investors or venture capitalists in exchange for startup capital. 
• Grants: While not very common, some businesses can start with local economic development grants or government grants. 
• Business Competitions: Participating in startup pitch and business plan competitions can be a viable way to get up and running. These competitions can provide non-debt financing in the form of prizes. Keep an eye out for local, industry-specific, and minority-focused opportunities.

5 ways to improve your chances of getting a business loan without revenue

1. Build and Improve Credit Score: Creditworthiness is crucial. If you have a low personal credit score, consider improving it by paying bills on time, reducing debt, and avoiding new debt.
2. Use a Personal Guarantee: This involves pledging your personal assets if your business fails to repay the loan. It’s a significant risk but sometimes a necessary one. Before taking this step, consider seeking advice from a financial advisor or attorney.
3. Gain Industry Experience: Lenders favor business owners with experience in their chosen field. If you lack relevant industry experience, consider partnering with someone who does or seeking guidance from a mentor.
4. Build Strong Relationships with Lenders: Avoid approaching lenders when you absolutely need money. Build relationships before you need a loan. That way, when you apply, you’re already a known quantity.
5. Be Transparent About Your Financials: Always be upfront and honest about your financial situation. Lenders appreciate transparency, and it builds trust.

Getting a loan with no revenue is difficult but not impossible

Building a startup is like writing a book — the first chapter is always the hardest. 

Securing a startup business loan without money may be challenging, but it’s not impossible. 

Recap:

• Start by drawing up a robust business plan demonstrating your business’s viability. 
• Look for assets that you can leverage as collateral. 
• Craft realistic financial projections that illustrate your repayment strategy.
• Most importantly, prepare yourself for potential risks and challenges that lie ahead.

As you navigate through this process, maintain transparency with your lenders. 

Highlight how you plan to generate revenue and what measures you have in place to mitigate risks. Remember, lenders are more likely to invest in your idea if they understand it and see its potential.

FAQ

Can you get a startup business loan with no revenue and bad credit?

Yes, but it is very challenging. Lenders see startups with no revenue and bad credit as high-risk. Improving personal credit, providing collateral, and having a strong business plan can help. Alternative funding like microloans or crowdfunding might be more accessible.

Can you get a business loan without a down payment?

Yes, but it’s difficult. Options include microloans, equipment financing, and SBA loans. Offering collateral or having a co-signer can improve your chances. Ensure your business plan and financial projections are solid to reduce perceived risk.

Is it easier to get a loan with an LLC?

An LLC can be beneficial as it shows a formal business structure, which may make lenders more confident. However, other factors like credit history, collateral, and a strong business plan are more important to secure a loan.

Noah Parsons

Noah is currently the COO at Palo Alto Software, makers of the online business plan app LivePlan.

Posted in Startups