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Starting a business can feel like a catch-22. This is because, in most industries, you cannot start operations without significant start-up capital. Unless generous investors are backing your business, you will need to take out a business loan, which usually requires your business to meet minimum income requirements to qualify.
New businesses or future business owners may find this approval hurdle frustrating, but there are always financing options available for cashless businesses.
Find the best small business loans of 2022
The Importance of Cash Flow for Commercial Lenders
Cash flow refers to the ratio of income and expenses of a business. A business can have positive cash flow, which means its overall revenue is greater than its expenses, or negative cash flow, which means its expenses are greater than its revenue.
Businesses with positive cash flow tend to be more reliable borrowers who can pay their debts, making them a worthy candidate for lenders. However, if a business has negative cash flow or no cash, lenders are usually reluctant to provide financing. Ultimately, lenders want to ensure that borrowers will repay what they borrow without any hassle.
When You Might Need a Cashless Business Loan
New businesses looking to start and grow their businesses may be looking for funding to enable them to do so. For new business owners who don’t secure start-up funds, chances are they’ll have to rely on money they can borrow now and pay back later.
Depending on the lender and your future business projections, a business loan or start-up business loan may be a viable option, even if you don’t have the cash. This can save you from dipping into your personal savings to start your business. However, it is essential to only borrow funds that you know you can repay on time.
4 Funding Options for Cashless Businesses
Here are the best ways to get a business loan when you have little or no income.
1. Commercial loans
Since many commercial lenders require potential borrowers to meet minimum annual income requirements to qualify for a loan, it is usually difficult to obtain a traditional commercial loan. However, some lenders happily provide small business loans to startups with no current income.
In the case of new businesses and startups without proof of annual revenue, commercial lenders who deem these businesses eligible for application will likely require additional documentation. For example, startups are typically required to provide financial projections and a detailed business plan to illustrate the company’s ability to repay debt.
2. Business credit cards
Business credit cards, like personal credit cards, allow you to borrow up to a predetermined credit limit. You must repay your balance at the end of each month, and any outstanding balance will start earning interest until it is fully repaid. This means you can avoid interest altogether if you pay off your balance in full monthly.
Unlike business loans, credit card providers typically use your personal income and personal credit score for qualification, making it a viable option for businesses with little or no cash. This means you won’t need to provide documentation showing monthly or annual revenue from your business. Most business credit cards require a minimum personal credit score of 670. However, a higher score will yield the best terms.
Best Business Credit Cards 2022
Find the best business card for you and identify factors important to your business
3. Equipment financing
Equipment financing allows you to finance the purchase of equipment necessary for the operations of your business. This can include everything from small items like electronics to large manufacturing machinery. The piece of equipment you are financing serves as collateral – something of value that the lender can repossess to recoup losses – and secures the loan.
Because collateral reduces the risk you pose to lenders, equipment finance lenders may be more willing to approve new businesses or startups with little or no cash flow. However, as with business loans, these businesses will generally need to provide financial projections and a detailed business plan that demonstrates the business can pay its debts.
Although a less traditional way to raise funds, 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, such as early access to 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 donors, and you won’t get anything. However, the advantage of crowdfunding is that the money you raise is purely donations, meaning you don’t have to pay it back to donors.
Crowdfunding is also cheaper than other forms of financing. Instead of paying interest to a bank, you pay a percentage of the amount you collect, usually between 3% and 5%. If your campaign fails, charges are not applied.
However, crowdfunding is not a guaranteed way to raise funds. 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 into one of these categories, you may have less luck with crowdfunding.
Be aware of repayment obligations
Taking out a loan is easy, but paying it back is much harder, especially if you have little cash.
Before you finalize anything, assess your current and future cash flow to make sure you can afford the payments. Be realistic in your projections. If you miss a payment, it could hurt your credit and make it more difficult to qualify for other credit products in the future.
If you are in default and have personally guaranteed the loan, you will need to repay the money with personal funds like your checking account or retirement account.
Should you get a cashless business loan?
Before taking out a business loan, analyze the numbers and see what you can afford to repay based on your current cash flow. Go through the worst-case scenario and see if you would be able to afford the payments. If you can, a business loan can 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.