Borrowing money inherently comes with a repayment schedule. However, it doesn’t have to require securing the loan with a piece of collateral. The exploding online business lender space is a great example of a funding option that doesn’t require collateral. This section will explore debt-funding options where you won’t be required to put your home or other collateral on the line.
Unsecured and Collateral-Free: Online Business Loans (Fintech Options)
What is an Online Business Loan?
After the financial crisis, the lending landscape permanently changed for small business. Obtaining the capital needed to start a business became harder and harder. Over time, traditional lending sources, such as your local bank were viewed as inefficient from prospective lending institutions. As technology companies enter the fray, these digitally advanced companies are looking to capitalize on the gaps in the traditional small business banking model.
These new online business lenders are making their loan decision by utilizing algorithms, predictive modeling, data aggregation and electronic payment technology – all to determine how risky it is to loan you money. They still look at traditional factors such as your personal credit history and business metrics, but layer in non-traditional data points to build their models.
The benefit to the entrepreneur and would be small business owners is not only how they choose to loan money but the way they deliver their service. They also focus on simplifying the application process and how fast capital can be accessed. Today you can fill out an application on your phone and have a loan agreement in under 30 minutes. Compared to about 24 hours of your time being spent filling out applications at three different banks before obtaining some form of capital or a denial. This results in entrepreneurs getting the funds they need in days, compared to the weeks it takes from traditional lending sources.
Online business lenders typically fall into three categories:
Peer-to-Peer Lending Platforms
These online platforms are comprised of individual investors. These platforms allow the investors to use their propriety modeling to help in decisions of who to loan money. You can expect to see rates from 8-24% and terms that cap at 5 years. Since these are individual loans, these platforms seek to attract borrowers with very clean credit histories.
Balance Sheet Lenders
These online lenders give short-term loans to fund working capital and inventory purchases, with terms that are typically less than nine months. These loans can have an annual rate of 30-120% depending on loans size and terms. You can think of them like merchant cash advances where a percent or amount is deducted from your account over the term of the loan.
These online marketplaces allow you to comparison shop products and lenders, both traditional and online lenders. The value these marketplaces provide is by reducing search costs for you and the lender. The rates and terms will depend on what lender you choose, but there will be no cost associated with using the marketplace as they make money from the lender when you get funded.
The emergence of online business lenders will hopefully continue to benefit entrepreneurs. While you can expect to have a higher interest rate from these sources of capital, the transparency in pricing and time saved in accessing capital can help small business get the capital it needs to thrive in quick fashion.
When Online Business Loans Make the Most Sense
While the emergence of online business lenders has expanded the amount of capital available to small businesses, the benefit has been mainly realized by existing business. With most online business lenders, you will be denied if your business hasn’t been in business for at least a year and in some cases two years. That is because they are looking for cashflows and other business related activities to help determine ability to pay back the loan. If you are looking for money to launch a new business, then you might find yourself frustrated going through online business lenders.
The one place within the online lending space where you might be able to get money to start your new business is peer-to-peer lending platforms. If you have poor credit but your business revenues are strong, online business lenders can be a great place to turn to for the money you need. A traditional lender will over emphasize your credit history, but since these online business lenders look at other factors it can be easier to get funding with less than perfect credit. However, if you are looking for money to start a business it is important you have a clean credit history, on peer-to-peer lending platforms, they use your credit history to determine the risk in lending you money.
Getting money fast is vital to meet the unexpected needs of a small business. Equipment breaks, a seasonal dip is larger than expected, new employees need to be added to payroll to meet demand, but what business can wait weeks for the money to meet these needs? Online business lenders are great for business who need their extra money in days, because they can’t afford to wait weeks or spend the time navigating the process.
One major hurdle for obtaining a loan through traditional lenders is having enough collateral to get the loan. If you want their money you will be forced to put you home on the line. With online business lenders, collateral isn’t part of the deal.
How to Get Started & Where to Find Online Business Loan Resources
Before you venture right into the path of getting funding from an online business lender, make sure you’ve explored all your other options first. It can be tempting to jump right in because the process is easy and quick, however because the rates will be higher, the overall cost of the capital will be higher as well. So, take some time to do your homework on other options listed in this guide before choosing to go the online lender route. For a review of the other options, go to chapters on Self-Funding, Equity Funding and Secured & Collateralized Loans.
Once you determine which online lender is the right option for you, it’s time to read The Ultimate Cheat Sheet for Your Business Loan Search, it will help you understand what type of loan will suite your business needs.
Next, it’s time to start exploring the online business lender that will suite your needs. There are dozens of companies out there and the list grows larger every day. But here are some great places to start:
Peer-to-Peer Lending Platforms:
Balance Sheet Lenders:
This article from Business News Daily has a few recommendations but more importantly includes a comprehensive list of all the online business lenders and a short description of their offerings to help you find the right online business lender.
Unsecured and Collateral-Free: Unsecured Loans (Credit Card Financing)
What it an Unsecured Loan?
Over the years credit cards have built a bad reputation, especially when it comes to how to finance a business. Some of that is earned due to low introductory rates that can sky rocket the moment a payment is late. However, some of the perceived negativity is the result of the borrower for not selecting the right type of card(s) needed to fund their business.
An unsecured loan is any type of loan that isn’t backed by a piece of collateral, but for this section we will explore unsecured loans in terms of credit card financing. You can simply use a credit card to pay for business expenses as you get started, but what if you need $125,000? Does your credit card have those kinds of limits? This is where unsecured loans come into play.
To get an unsecured loan, you should work with specialized firms. They work by finding the best type of credit cards, usually one that allows a high balance, has no cash advance fees and has no interest payments for a year. Then on your behalf, they apply and then liquidate those credit cards, prior to the inquiries for credit hitting your credit report. This would normally make it hard to get that same number of credit cards if you did it slowly over time. What you are left with is an infusion of cash that can be used for any business expense and with no collateral requirement.
The amount you are qualified for will vary depending on your credit score but ranges from $10,000-$150,000. There is a minimum credit score requirement of 690, but your overall score and depth of credit history will impact the amount you are qualified for. The intent is to payoff these credit card within a few years because after year one they go from no interest, to upwards of 14%. The companies that offer this service will charge a fee that will be a percentage of the funds they obtain for you.
Make no mistake, this will damage your credit in the short term by obtaining and liquidating that level of credit in such a short period. However, if you follow their program and get your card paid down to lower utilization percentages and make your payments on time, you will see an improvement to your credit score in the long term.
When Unsecured Loans Make the Most Sense
Clean credit is vital to making this option work for you. On top of having a minimum credit score of 690, you also must have a credit utilization rate below 50% on your current cards. You also need to have no recent derogatory comments on your credit report and minimal recent credit inquires. If you plan to explore getting other debt within a year of getting an unsecured loan, you will want to rethink this as an option. The short-term impact to your credit will limit those capabilities.
An unsecured loan is a great option if you need the money fast as it usually only takes 3-4 weeks to obtain the funds. Another thing you will want to do fast is pay of the credit cards. If you are starting a business that will have a quick revenue stream that will allow you the benefit of paying down your cards, then an unsecured loan can be a great option. If you feel it will take 12-18 months to see any revenue, you should look for a different funding source. Once that 12-month period is up, you will need to start making interest payments that are upwards of 22%.
Collateral is a huge sticking point on traditional banks loans. As the name suggests, unsecured loans have no collateral requirement. This makes this a great option for you if you don’t have the collateral required for other funding options or if you would rather not put up your home as collateral.
How to Get Started & Where to Find Unsecured Loan Resources
Unsecured and Collateral-Free: Factoring (Accounts Receivable Financing)
What is Factoring?
Cash flow is the life blood of any business, large or small. For small business, having money on hand can be the difference between accepting a new project or having to delay payroll. What if you had billed your clients, but where just waiting for payment? The cash is out there, but you are stuck waiting for it to come in. That is when factoring, also known as accounts receivable financing comes in.
With factoring, you can leverage your huge stack of unpaid invoices to turn them into cash today. The way it works is you turn your unpaid invoices over to a factoring company. They will charge you a fee of 1-5%, depending on your sales volume and credit of your customers. After you pay the fee, the factor company will receive an advance from the factoring company of 70-90% of the values of the invoices. Once the factoring company receives payment on the invoices they will pay you the remaining balance.
Here is an example of how it works. Let’s say you have $20,000 in unpaid invoices and need that money to buy a machine to meet increasing demand. You sell the invoices to a factoring company that charges you a fee of 3% which is equal $600. The factoring company then advances you 85%, which gives you $16,490 to continue running your business. Once your customer meets their 60-day payment terms and pays on them, then the factor company pays you the remaining balance of $2,910, which is equal to 12% of initial invoice. When it is all said and done, after factoring your invoices you will receive $19,400 for $20,000 in invoices.
Now that you understand the concept of how it works it is important to know where the risk lays in this financing option. When selecting a Factoring company and looking there are two terms that are important to understand.
This means that you will be responsible for payment of the invoice from your client if the factoring company isn’t able to collect payment.
This means the factoring company takes on all the risk of collecting on the invoice from your client. If your client doesn’t end up paying the factoring company takes the loss, not you.
Factoring is an easy way to finance the working capital you need for your business. You may see it being touted as debt-free because you are not locked into a repayment plan like a traditional loan. Be mindful that while factoring can be a savior, you are robbing Peter to pay Paul and losing a small percentage in that transaction. The factoring company also frequently have other fees hidden in the mix beyond their factoring fee, so watch out because what can seem like a great deal to get cash today, can quickly cost you a lot in the end.
When Factoring Makes the Most Sense
Due to how factoring works, this funding option is only available for existing businesses with outstanding invoices. Most retail businesses don’t qualify unless they have certain clients that pay via invoice, collecting only cash and credit card payments won’t result in an invoice to factor. Also, if you are looking for money to start a business, factoring is far from a possibility.
It goes without saying that factoring makes sense if you need working capital and have invoices you are waiting to be paid on. It can also be a great way to extend the payment terms of your most loyal clients but get your hands on the money as if they paid in real-time.
Having low personal or business credit isn’t a factor in whether you can receive funding through factoring. Factoring companies look at the credit of your clients to determine what they will fund. If your business hasn’t built up a credit history, it can be hard to get a loan from a bank, but with factoring you don’t have to worry about that.
Choosing a factoring company that will agree to non-recourse factoring can be a great option for a small company that doesn’t want to take on the headcount required to chase down and collect on their invoices. For the cost of the factoring fee, you can have someone else do that for you.
How to Get Started & Where to Find Business Factoring Resources
To get started, look at your accounts receivable to see if you have any invoices where you are awaiting payment. If you do, take a moment to read this article on What is Factoring. It does a great job of answering common questions about factoring.
Before you begin your search for the right provider you will also want to read this article on the basics of factoring and how to pick a factoring company. While the author of the article is a factoring company, they do good job of highlighting specific things to look for during your selection process.
To get you started on your search, here are some of the top rated factoring companies; BlueVine, Fundbox, Dealstruck and Triumph Business Capital. Remember, as you explore your options for factoring, make sure to pay attention to fees beyond the factoring fee. If they slip something by you, you could end up paying a lot more than you intended.
Unsecured and Collateral-Free: Government and Private Grants
What is a Business Grant?
Using personal cash, getting loans or bringing on investors isn’t your only option for acquiring the cash you need for your small business. Grants offered by government organizations, companies, banks and non-profits can be a viable source of funding for your business.
A grant is money given through an application process, where the funds typically come with restrictions or requirements for how they will be used. Since the money doesn’t need to be paid back, getting a grant is way harder than getting a loan. Think about it, for every grant being issued they are sifting through hundreds if not thousands of applications looking for the right applicants to fund. Since there is a finite amount of money being given away, the grantor wants to make sure it has the largest impact possible.
In some case getting a grant can be free money. In other cases, they may require you to match the funds yourself, or combine the grant funds with another form of financing. Depending on the grant they may also require you to report back on your outcomes. In some cases, if you don’t meet your outcomes the money may have to be paid back. Don’t go around apply for any grant your find, take the time to read them and understanding the outcome they are looking to produce and the terms.
There are thousands of grants out there so finding the grant that is aligned to your business objective can feel like searching for a needle in a haystack. To help with your search it is important you develop a compelling story and have an idea of the types of grants you want to go after. Looking to develop a more energy efficient refrigerator? Look for energy grants, not grants focused on education.
When Grants for Business Make the Most Sense
Considering grants is never a bad starting point on the hunt to obtain business financing. You never know who might be sitting out there. However, don’t have your entire business riding on obtaining a grant. Due to the difficulty of finding one, you should make sure you’re exploring other sources of funding simultaneously.
For grants to be a good source of funding you can’t have a short timeline for receiving the funds. The grant process is tedious. You have to fill out their applications, which are comprised of lots of extensive details. Once you submit the application, you will need to wait for them to go through all the applications. Sometimes there can be follow up questions and work required before the funds are released. So, while getting grant money can be great, it doesn’t come quickly or easily.
There are certain types of businesses that are more likely to get funded. A lot of the times the grants are being given to businesses that are engaged in some form of research and development. That being said, since there are so many grants, there may be one out there that is looking to help a business add employees, make a capital investment or upgrade outdated equipment.
A grant is free money…kind of. You need to be okay with taking on a partner who cares how their money is spent and will want you to report back on the impact that money made. The good part is, unlike a normal partner, you aren’t required to share profits with the grantor. However, if you are the kind of business owner who wants to be their own boss and doesn’t want to report back to someone else, then accepting grant money might not be your best course of action.
How to Get Started & Where to Find Business Grant Resources
The first place to start is seeing what grants are out there. One of the best resources is Grants.gov. To find more local grants you can check in with your governor’s office to find state grants or reach out to your local chamber of commerce to be connected with resources to learn about grants in your city.
Once you find the right grants comes the writing. Before you start typing away, check out How to Write a Winning Grant Proposal. If you choose to go at it alone, there is software out there that can help writing and tracking of your grants. Another option is to hire a grant writing professional. If you do a google search, be careful because there are a fair number of scams out there. A trusted site to connect you with trusted grant writers is the Grant Professional Association. Good luck on your hunt!