How to Get a Business Loan With No Security
A business loan with no security is referred to as unsecured in the financial world. This means that the person requesting the loan has no collateral to put up as security for the loan. Collateral is a valuable asset which can be sold in order to pay for the loan. Essentially, the lender takes "paper" ownership over the asset; however, all rights and benefits of ownership remain with you. Should your loan go into default, this collateral might be sold to pay off your loan. An unsecured business loan is therefore a loan with no collateral, but there are other ways to mitigate the risk of default.
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Things You'll Need
- The past three years of personal income tax returns
- Financial statements (cash flow, income and balance sheet)
Instructions
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Determine if you have the right qualifications and the right management team. Unsecured business loans are good for the self-employed, doctors wishing to open a practice, or partners in a new restaurant franchise. The range is large. Your education, experience and business idea must be compelling. If you are weak in any one area, find a partner who isn't.
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Develop a compelling financial argument. Pay particular attention to the cash flow statement. Lenders will be more willing to invest if they can get their money back fast. The payback period is an overlooked point in financial negotiations.
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Prepare income and cash-flow statements in monthly installments. Lenders for unsecured loans tend to micromanage the loan in tighter increments. Yearly updates turn into monthly reviews.
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Be resource efficient. Resource efficiency is something venture capitalists, angel investors and commercial lenders look for. It refers to doing more with the same amount. An example of a resource-efficient industry is telecommunications and media. In general, it costs the same the same to produce no matter how many people are using the service. Technology, specifically software for certain functions such as accounting and asset management, is a great tool for adding resource efficiency to your business model.
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Prepare your own personal tax returns for the past three years and any other information to prove your stated level of income. Also include documentation supporting all assumptions made for monthly cash flow and income projections.
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Prepare for a higher rate. Lenders use a higher rate to compensate for the risk of default. Rates can be as high as 30 percent and the payback period can be as long as 25 years. Contact at least three lenders for a variety of options.
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Create a credit profile for your business entity. Creating a distinct corporate structure, such as a limited liability corporation, can separate your assets from your business. This is a good idea for both credit quality and legal considerations. This may also be a loophole around issues of poor personal credit.
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