How to Get a Startup Business Loan With No Money

Launching a startup without a pile of cash might seem like trying to bake a cake without flour. However, it is possible, albeit challenging. In this post, we will unpack the puzzle of getting a startup business loan without money. We’ll delve into understanding lender requirements, how to determine how much you should borrow, learn how to figure out if you’ll be able to repay the loan, and explore alternatives to a business loan.

Understanding lender requirements

Before jumping headfirst into the loan application process, it’s vital to take the time to understand what lenders are looking for and what the requirements are for the loan you are applying for. Although you might be starting with little or no money of your own in the bank, lenders will want assurances that their money will be put to good use and, most importantly, paid back in time. Lenders will look at:

1. Business Plan: This document should articulate your business concept, target market, and competitive advantage, along with a clear roadmap of your financial projections. Most lenders will want 12-24 months of monthly projections and another 1-3 years of annual projections for a total 5 year forecast. An excellent business plan convinces the lender that you know what you’re doing and where you’re going. You can learn how to write a business plan in our guide.
   
2. 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. This process is similar to applying for a mortgage when you buy a home.
   
3. Collateral: Even if you have no money, assets like property, equipment, or inventory can often be used as collateral for a business loan. The majority of business loans will require some form of collateral.
   
4. Cash Flow and Income: If you’ve already started selling your product or service – even if it’s just a few initial orders – lenders will want to see financial statements and projections that demonstrate your business’s profitability and cash flow. Lenders will be looking to see if you have the ability to pay back the loan. If your business isn’t up and running yet and you have another job, lenders will want to look at your personal income.
5. Business Experience: Lenders often favor business owners with experience in the industry. This experience reassures them that you possess the necessary knowledge and skills to navigate the business landscape successfully.
6. Legal Aspects: Ensure all your legal ducks are in a row. This includes business licenses, registrations, contracts, leases, and any other legal documents relevant to your business.

Every lender will have different requirements, so take the time to thoroughly review a loan application from top to bottom before you start filling it out. Don’t start an application if you’re unsure that you have all of the required documentation. 

Determine what you need and if you will be able to repay

Before you apply for a business loan, make sure you have a good understanding of 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 a budget for everything it’s going to take to initially launch your business in addition to your expenses for the first several months that you’ll be up and running. For most businesses, initial sales won’t cover all of your expenses, so it’s important to have enough cash in the bank to cover the initial shortfall until you reach positive cash flow and profitability.

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 as well. 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 plan for paying them back. 

This is where you need to carefully consider your personal finances. Can you afford to take on a business loan? Consider your other financial obligations and whether you can meet them if your business doesn’t generate profits as quickly as projected. 

Different types of startup loans to consider

Not all loans 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. Different loans will have different requirements, so it’s worth learning about the different options:

• Microloans: These are small loans, often less than $50,000, provided by nonprofit organizations, the SBA, and specialized lenders.
• 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.
• 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.
• Loans on receivables (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.

Tips to improve your chances of getting a startup business loan

1. Build and Improving Credit Score: Creditworthiness is crucial. If you have a low personal credit score, consider taking steps to improve it, such as paying bills on time, reducing debt, and avoiding new debt.
2. Use a Personal Guarantee: This involves pledging your personal assets in case 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 don’t have relevant industry experience, consider partnering with someone who does or seek guidance from a mentor.
4. Build Strong Relationships with Lenders: Don’t just approach lenders when you need money. Build relationships before you need a loan. That way, when you do apply, you’re already a known quantity.
5. Keep Financials Transparent: Always be upfront and honest about your financial situation. Lenders appreciate transparency and it builds trust.

Remember, getting a startup business loan is part perseverance, part preparedness. Ensure your business plan is polished and your financial projections are robust.

Understand the risks of business loans

Just as a coin has two sides, so does taking a loan. You must be mindful of the risks involved when borrowing money. If the business doesn’t go as planned, you’ll still be on the hook for repaying the loan. If you pledged any assets as collateral, you could lose them.

Take the time to understand the terms and conditions of any loan agreement before signing. Consider seeking advice from a financial advisor or attorney to ensure that you fully understand the potential risks and liabilities. 

Borrowing money to fund a startup can be a daunting process, especially when you’re starting with no money. But remember, every business journey starts with a single step. By understanding lender requirements, determining your ability to repay, and understanding the risks, you’ll be well on your way to securing the financing you need.

Alternatives to business loans

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

1. 1. Investment: Raising capital through investment means that you’re selling a piece of your business (equity) to investors in exchange for startup capital. Angel investors or venture capitalists are sources of investment, but many businesses get started with investments from friends and family. 
   2. 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.
   3. Grants: While not very common, some businesses get started with local economic development grants or grants from the government. 
   4. 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.

Remember, building a startup is like writing a book — the first chapter is always the hardest. The process of securing a startup business loan with no money may be challenging, but it’s not impossible. It requires a solid understanding of your business’s financial forecast and a high degree of organization and perseverance.

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

As you navigate through this process, maintain transparency with your lenders. Explain your business model, goals, and strategies clearly. 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.

Noah Parsons

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

Posted in Startups