What Does This Word Collateral Mean in Loans?

Collateral is a word that is thrown around a lot in the entrepreneurial world, but what does it mean? Collateral, also known as working capital, is an asset that you have available to permit you to take loans. Collateral serves as a source of guarantee to your lender. It needs to be liquidated, valuable, and in most cases, twice the value of the amount borrowed. Meaning that, it can be seized by the lender should you fail to pay back your loan.

  In essence, collateral serves both lender and debtor in that it symbolizes security of finance for the lender and a means to access finance for the debtor. So, as an entrepreneur looking to get some finance through a loan, it is important to have valuable collateral (  as it is required by most lenders, be it personal or financial institutions ). Is it possible to get a loan without collateral? Yes, it is. Is it safe to get a loan for a startup without collateral? Let us find out 

Is it safe to get a loan for a startup with no collateral?

First of all, you should know that getting a loan for a startup with no collateral has become much easier than it used to be. Before, many banks wouldn’t loan to you without some sort of collateral, but this is no longer the case. The only thing you need to do is to prove that you can repay the loan without any problems. As a novice entrepreneur, you don’t have a lot of assets that can be used as collateral. However, there are ways around this.

• You can use trust to put your business in trust. When you put your business in trust, you can get a loan up to the value of the business. This means that you don’t need any other assets as collateral.
• You can declare your business as a Sole Proprietorship and give the majority of your business to a friend/relative. This will help you get a loan as the majority of the business is owned by you. The lender will consider this as part of your assets.
• You can incorporate your business as a limited liability company (LLC). This means that your assets will be used as collateral.
• You can consider crowdfunding as another way of raising money. With crowdfunding, you don’t need to worry about investors as they are only looking to invest in projects that they believe in.

Now that we are clear on what collateral is and how to get a loan without one, let us talk about the available non-collateral loans. 

The best loans for startup businesses with no collateral

Below are some of the most recommended ways to get low rate startup business loans with no collateral

• Bank credit facilitation scheme

Every year, the Indian government comes up with a new loan scheme. The bank credit facilitation scheme is one such loan scheme that was introduced by the government in 2016. The scheme aims to promote small businesses in the country. Under the scheme, banks are provided with a guideline on how they should promote and offer loans to e-commerce and other businesses without collateral. 

Banks are also required to assist in setting up of business, processing loan applications, provision of loan disbursal, and assessment of repayments. The loan amount under the scheme is up to Rs 50 lakh and the repayment period should not exceed 25 years.

• Online Business term loans

Online business term loans are short-term loans that have a fixed repayment period of one to two years and usually have very high-interest rates. These loans are not recommended for startups without collateral because of the risk involved, but there is still hope for those who need them. For example, there are lending platforms that provide lower interest rate online business term loan opportunities if you already possess a proven track record in past business ventures as well.

• External fundings

It’s important to know that external funding, such as grants and loans, is not considered working capital. Therefore, they are not counted as part of your business funding. However, they can help you get the funding you need and they’re easy to get. A grant is given by a government organization or a non-profit organization without any conditions attached to it. A loan, on the other hand, is given by a bank or a financial institution with terms and conditions that are usually attached to it.

• Grants

Grants are usually awarded by a government organization or a non-profit organization. They can come in various forms, such as research grants, fellowships, or scholarships. You can apply for these grants online through a specified government website. Grants can go up to any amount depending on the strength of your business plan. 

• Business credit cards 

Business credit cards are offered by banks that specialize in lending money to small and medium-sized businesses. The loans taken with credit cards work similarly to personal loans. Here, you borrow money surpassing your credit limit and pay back installmentally over some time and an agreed repayment term. 

 These banks usually have a good credit score, so they are likely to approve you for a business credit card. One of the best features is that it can be used for any purpose, including business expenses like equipment purchases or repairs! Thank goodness this type of card exists so we don’t end up without funds when something goes wrong with our company’s goods and services!

If you decide to apply for a credit card, whether it is in your name or someone else’s, you must know the interest rate and repayment period. Keep this in mind when deciding if they are worth pursuing vs not. If the terms of your business credit cards are too much, then don’t bother applying for one because even if you have collateral and a proven track record with previous businesses, the bank will likely deny the application anyway. 

Their justification would be that there isn’t enough information about your current finances to justify giving away such an amount of money without any guarantee whatsoever! If possible try to negotiate with them before applying as well so that there can be more transparency on all sides.

Conclusion

Taking loans for a startup business with no collateral is not only possible but can also be considered safe depending on your risk-taking assessment and the terms of your loan. Above are a few examples of the many non-collateral loans available. But before applying for a loan,  you want to make sure to have a good business plan and be confident in your potential. Once you have these settled, you can begin applying for loans.