Small business loans

Small business loans

Starting a business can feel like a Catch-22. That's because, in most industries, you can't begin operations without significant starting capital. Unless generous investors back your business, you'll need to take out a business loan, which typically requires your business meets minimum revenue requirements to qualify.

New businesses or aspiring business owners may find this barrier to approval frustrating, but there are still financing options available for businesses with no money.

The Importance of Cash Flow to Business Lenders

Cash flow refers to the income and expense ratio of a business. A business can have a positive cash flow, which means its overall revenue is higher than its expenses, or a negative cash flow, which means its expenses are larger than its revenue.

Businesses with positive cash flow tend to be more reliable borrowers that can afford their debt obligations, making them a trustworthy candidate to lenders. However, if a business has negative cash flow-or no money-lenders are typically hesitant to provide financing. At the end of the day, lenders want to ensure that borrowers will repay what they borrow without any issues.

When You Might Need to Get a Business Loan With No Money

New businesses looking to get off the ground and grow their operations may be on the hunt for financing that enables them to do that. For new business owners who don't secure startup funds, it's likely they'll need to rely on money they can borrow now and repay later.

Depending on the lender and your future business projections, a business loan or startup business loan may be a viable option, even if you have no money. This can help you avoid dipping into your personal savings to get your business started. However, it's crucial to only borrow funds you know you can repay on time.

4 Financing Options For Businesses With No Money

Here are the top ways to get a business loan when you have little or no revenue.

1. Business Loans

Because many business lenders require prospective borrowers to meet minimum annual revenue requirements to qualify for a loan, it's typically challenging to secure a traditional business loan. However, some lenders willingly provide small business loans to startups with no current revenue.

In the case of new businesses and startups without proof of annual revenue, business lenders who deem these companies eligible for application will likely require supplemental documentation. For example, startups typically need to provide financial projections and a detailed business plan to illustrate the business' ability to repay its debt obligations.

2. Business Credit Cards

Business credit cards, much like personal credit cards, let you borrow up to a predetermined credit limit. You're expected to repay your balance at the end of every month, and any unpaid balances will begin to accrue interest until fully repaid. This means you can avoid interest altogether if you repay your balance in full monthly.

Unlike business loans, credit card providers typically use your personal income and personal credit score for qualification, making them a viable option for businesses with little or no cash flow. This means you won't need to provide documentation that demonstrates your business' monthly or annual revenue. Most business credit cards require a minimum personal credit score of 670. However, a higher score will yield the best terms.

3. Equipment Financing

Equipment financing lets you finance the purchase of equipment necessary to your business operations. This may include everything from small items like electronics to large manufacturing machinery. The piece of equipment you're financing serves as collateral-something of value the lender can repossess to recoup any losses-and secures the loan.

Because collateral reduces the risk you pose to lenders, equipment financing lenders may be more willing to approve new businesses or startups with little to no cash flow. However, similar to business loans, those businesses will typically need to provide financial projections and a detailed business plan that demonstrates that the business can afford its debt obligations.

4. Crowdfunding

Although it's a less traditional way to raise money, crowdfunding has become a popular source of business funding. Here's how it works: You choose a platform, like Kickstarter or Wefunder, and create a post describing your product or service. Then, you choose a goal amount and create tiered rewards for contributors based on the size of their donations, like early access to the product, special features or merchandise.

The downside to crowdfunding is that you usually have to reach your fundraising goal to receive any amount of money. If you don't reach the goal, most platforms will refund the donors, and you won't get anything. However, the advantage of crowdfunding is that the money you raise is purely donations, meaning you're not required to repay it to the donors.

Crowdfunding is also less expensive than other forms of financing. Instead of paying interest to a bank, you pay a percentage of the amount you raise-typically ranging from 3% to 5%. If your campaign is unsuccessful, fees are not applied.

However, crowdfunding isn't a guaranteed way to raise money. Research shows that only 23.3% of all crowdfunding projects are successful. Technology, games and design projects are the most popular categories. If your business doesn't fit in one of those categories, you may have less luck with crowdfunding.

Be Aware of Repayment Obligations

Taking out a loan is easy, but repaying it is much harder-especially if you have little cash flow.

Before you finalize anything, evaluate your current and future cash flow to make sure you can afford the payments. Be realistic with your projections. If you miss a payment, it could hurt your credit and make it harder to qualify for other credit products in the future.

If you default and have personally guaranteed the loan, you'll have to repay the money with personal funds like your checking or retirement account.

Should You Get a Business Loan With No Money?

Before taking out a business loan, run the numbers and see what you can afford to repay based on your current cash flow. Go through a worst-case scenario and see if you would be able to afford the payments. If you can, then a business loan may be a smart move. The last thing you want is to be stuck with a loan you can't afford to repay and the repercussions that come with it.

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