Financing an enterprise is a serious issue that a lot of people resolve either by finding an investor or by finding a partner so have you thought about business loans for a lack of collateral? The problem with both of these methods is the fact that it means relinquishing a part of equity within your own company, which is a serious matter, to say the least. In order to avoid this, you can either finance your enterprise from personal means (dipping into your own savings account, selling an asset or applying for a personal loan) or apply for a business loan.
Keep in mind that once your business becomes profitable, you can use its income to cover these monthly credit payments. Sure, this adds one more item to your already impressive list of expenses but it’s definitely a self-sustainable system. The problem, nonetheless, lies in the fact that, no matter how great your plan is, there’s no guarantee that your idea will make it. This is what makes lenders cautious and even makes them request some sort of assurance. Most commonly, this assurance comes either in the form of a co-signer or collateral. Fortunately, as of lately, the unsecured business loans are getting more and more common. Here are several things you need to know about them.
1. Learn about unsecured business loans
The first thing we need to cover are the unsecured loans themselves and the best way to do so is to briefly discuss their secured counterparts, as well as to cover the topic of collateral. You see, a secured business loan is one that’s backed up by collateral that you own. This can be a property, an account receivable, a mortgage, etc. and it is something that the lender can use to cover their expenses in a scenario where the borrower is unable to meet the necessary requirements. The problem with this system, as well as the point behind this whole post lies in the fact that a lot of people don’t have the collateral in question, to begin with.
Fortunately, for all those lacking suitable collateral, there’s always the option of applying for an unsecured business loan. First of all, these loans rely on a system known as credit score, which allows lenders to get a fairly accurate estimate of one’s financial trustworthiness and the likelihood that they’ll repay the loan and do so in time. Still, provided that your credit score is bad, chances are that you won’t be able to get favorable loan terms. Nonetheless, there are some lenders who specialize in loans for those with particularly bad credit (or who do not require credit score check at all). Still, these so-called bad credit loans usually have incredibly unfavorable terms.
2. What is a credit score?
Previously, we’ve mentioned the issue of a credit score as a major factor when it comes to securing a decent loan tip for your credit, still, do you really understand your credit score? The most commonly used system is the FICO score, a number that ranges between 300 and 850 and gives your potential lender a fairly reliable idea of just how trustworthy you are. The score below 580 is considered to be very poor, while everything above 740 is considered as very good (with 800 and more being exceptional). Needless to say, the majority of credit scores are somewhere between 600 and 750.
The way in which this credit score is calculated is also quite important to understand, seeing as how it directly affects your ability to improve the score, later on. The reason why this is so important is due to the fact that it is a knowledge that you can use to improve your credit score (something that we’ll discuss later on).
Generally speaking, there are five major factors that affect your credit score. The first and the most important factor is your credit history or whether you’ve made all your payments in time. The second one is the total amount of money that you owe. The third one is the length of your credit history (which is one of the main reasons why you shouldn’t close your credit card). You see, the longer your history is, the more material there is to review and the more accurate your trustworthiness estimate will be. The last two factors are the types of accounts that you have and your recent credit card activity.
7 Unsecured Business Loan Tips for a Lack of Collateral
3. Understand your situation
Perhaps the most important thing you need to figure out when you start considering an unsecured business loan is the issue of your own situation. First of all, you need to understand where you’re at. For instance, you can start by asking yourself how much money do you need and is this situation likely to change in the nearest future? If you expect to need an additional loan in a couple of months, it might be a better idea to apply for a line of credit instead of a traditional loan.
Then, you need to consider how much credit you can actually afford. Depending on the terms of the loan in question you’ll be asked to make monthly repayments. Once you add these repayments to your already existent list of expenses this might be a bit too much for you to handle. Fortunately, a lot of platforms specializing in fast cash loans also provide calculators to help you make this out. Here, you need to type in the amount of money that you intend to borrow, the loan term and your credit rating. For the last part, you also might want to look for an online platform specializing in credit score reporting. Keep in mind that while this may seem like a lot of hassle, it is A) worth it and B) not something you do every day.
4. Shopping around for the best loan
The next thing you need to do when you start looking for a business loan is to start looking at various options. Here, you’ll get familiar with industry standards like interest rates, loan term and similar factors. Keep in mind that there’s a number of organizations and institutions offering loans for all interested parties and that you, as an individual or organization may be eligible for.
For instance, your first stop should be a national bank, followed by other banks and credit unions. Then again, there are numerous organizations offering special loans, depending on your demographic. For instance, there are some institutions, even government grants and programs that are willing to offer business loans to female entrepreneurs or to those belonging to a certain minority demographic. These loans usually have more favorable terms, seeing as how the reason for their existence isn’t exclusively tied to the generation of profit but, instead, also have a humanitarian aspect.
Lastly, you need to understand that the majority of startups get financed from personal means, which means that a lot of people get personal loans to finance their enterprise with a personal loan. Loans from friends and family members are also quite popular, seeing as how as many as 38 percent of all startups get funded this way. Nonetheless, keep in mind that both of these methods have some quite serious downsides to consider.
5. Work on your credit score
Once you are dead set on getting the loan, you might want to start working towards the improvement of your credit score in order to get better terms. Sure, we’ve previously mentioned the fact that the length of your credit score is incredibly important but you would be surprised at how much improvement you can make in a matter of months. For this, nonetheless, you first need to learn how to do this properly and there are several reliable methods.
First of all, you need to start paying all your bills on time. Second, you need to realize that it’s not just about your debts but about all your financial responsibilities like cell phone payments and your utility bill. As we’ve already mentioned, it’s definitely a bad idea for you to close your credit cards, even if you’re not currently using them. Why? Well, because it shortens your credit history. Finally, while you’re improving your credit score, you might want to refrain from applying for new credit accounts and only do this if absolutely necessary.
Debt consolidation is another strategy that’s commonly used for a quick improvement of one’s credit score. First of all, it makes your job of meeting all the necessary payments on time, seeing as how it gives you one payment date to focus on instead of several. Second, while the amount of money owed remains the same, the number of debt types reduces which is, once again, a huge plus. This alone can make a huge difference and make your life so much easier.
6. The loan term
One of the biggest dilemmas that people make when it comes to the length of the repayment term is the question of whether it’s better to go for a short or a long term. You see, even though you might be able to pay off your entire loan within a year, the question is often raised about whether this is the right thing for you to do. Why? Well, first of all, you need to keep in mind that the shorter the term of repayment, the bigger the tool it will have on your life as a whole. In other words, the length of the loan term is a lifestyle question and, as such, it’s far more important than it may seem to you at the moment.
On the other hand, a shorter credit makes for fewer payments, which means that the likelihood of unintentionally missing a payment becomes a lot smaller. Aside from this, it helps you become more focused, seeing as how a heftier payment is harder to forget and, therefore, miss. Also, there are some people who find that debt creates a sort of psychological pressure, meaning that the longer it lasts the more they’ll have to endure. Fortunately, with a shorter loan term, such a thing wouldn’t last nearly as long.
7. Alter your lifestyle
As we’ve already mentioned, having a loan will put you under a certain level of financial stress and there are only two ways to handle this properly. The first one is to increase your income and the latter is to lead a more austere lifestyle. Both of these are there to help you cope with this problem by mitigating the subjective feeling of being in debt. For instance, if your monthly credit payment is $300 and if by the time you start repaying it your monthly income increases by $400 you will end up having more money than before, even with this additional expense.
When it comes to austerity, this is a somewhat more complex issue, seeing as how it requires you to relinquish some habits or luxuries that mean a lot to you. Still, this doesn’t have to be anything severe. In fact, living the life of a hermit and venturing into severe austerity is quite dangerous, seeing as how you might lack the discipline to make it all the way through. It’s not just about saving money so that you can pay off the loan, it’s about learning how to live with the loan without feeling too much pressure and being there in the long run.
The very last thing you need to keep in mind is the fact that some of the above-listed tips aren’t necessarily related to unsecured or even business loans but loans and debts, in general. Second, you need to understand that your credit score isn’t just for getting approved for a loan. No, it’s also there to help you get better insurance premiums and it can even be considered when you apply for a job in the financial sector. Lastly, even if you don’t need a loan, at the moment, a time will come when you might find yourself in need of one. Once this moment arrives, it’s far better for you to be ready.
|Lucas H. Parker
Freelance writer & Editor-in-chief at savingforserenity.com
From Sydney, Australia
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