This article was reviewed and updated on July 30, 2020
With so many small business loan options, it can be challenging to know what choice is best. For many business owners, without any assets that could be used as collateral, a business loan from traditional lenders becomes more difficult—if not unattainable. Fortunately there is small business financing available that doesn’t require specifically identified collateral to secure the loan. This type of small business loan is often call an unsecured business loan. In this article will describe what it is and how to apply for unsecured business loans.
Understanding more about “unsecured” loans generally, what they use in leu of collateral to “secure” the loan, the application process, and what it take to qualify will help you prepare for your loan application and improve the odds of success with a potential.
What Are the Benefits of an Unsecured Business Loan?
There are millions of small business owners who have incredibly profitable businesses but don’t have assets a lender would accept as collateral. Although calling these loans “unsecured” could be considered misleading, because they don’t require specific collateral like real estate, heavy equipment, or some other easy-to-liquidate asset in the case of default, they are commonly referred to as “unsecured” and we will refer to this type of financing in the same way.
What these loans typically do require is a lien on general business assets, referred to as a UCC lien, and a personal guarantee. Most lenders today that offer collateralized loans will also expect a personal guarantee, so this isn’t unique to an unsecured small business loan, but something you should be aware of going in.
Although many of the small business loans that would be categorized this way often come with higher interest rates than a traditional bank loan or an SBA-guaranteed loan, they have some distinct benefits and advantages when compared to their more traditional counterparts.
- These loans are based upon the financial strength of your business and your credit profile and not dependent upon whether or not you have have sufficient assets to be used as collateral.
- More healthy businesses can access borrowed capital this way compared to traditional collateralized financing.
- The application process for these loans is often easier and more accessible.
- Lenders offering this type of financing can often respond to a loan application within the same day.
- Funds are often available to the business owner within a day or two.
- Loan terms are designed to fit the business need.
For many small businesses, the ability to access borrowed capital quickly and easily without the need to encumber real estate or other assets is attractive—even if they do have assets they could use as collateral.
1. Understand how the application process works
Business loans are not something to jump into blindly, and using this guide will help you prepare for the loan application process. You should also get a feel for what lenders are looking for in potential borrowers, along with how long it might take for application, approval, and funds disbursement.
If you are looking for access to a quick-cash solution beyond a business credit card, for example, many of the traditional lenders out there won’t be a good fit. Most online lenders today offer streamlined applications (a simple online application of less than a page), a quick answer to your loan request (often the same day), and access to funds in a matter of days—much faster than what is typically available at the local bank or credit union.
Ask yourself these questions to better prepare yourself for the lending cycle ahead:
- Do I have time to see the application process through? How fast do I need the money?
- Am I prepared to provide the financial records that will be asked of me (these will vary depending on the lender)?
- What does my personal credit score and business credit history look like?
- Do I want to do the application online or in person?
- What loan amount do I need to fill my business need? What is the ideal amount?
- Is there a type of loan that I’m not interested in?
- Do I have collateral and do I want to use it to secure a loan?
Having these questions answered ahead of time can help you through the next step.
2. Types of Unsecured Business Financing
You’ve already expressed an interest in no-collateral, or unsecured, credit, but there are many types of funding available that fall into this category.
How long do you need to pay back the loan? Some short-term business loans, including vendor or merchant financing, are options that won’t require collateral in most cases but will require repayment within weeks or months. Standard SBA loans, on the other hand, give you up to 10 or more years for repayment, but typically require collateral. Generally speaking, the SBA doesn’t always require an SBA-guaranteed loan be fully collateralized, they will expect all the collateral you have available—including any personal property you might have. If you’re needing cash to buy business property, you may have the same number of years you get for a home loan (15 or 30 years, in some instances.) Cash advance funding, usually requires a daily automatic debit from your business bank account.
There is a correlation to how easy capital is to access and the cost of the capital in terms of interest costs. That same correlation exists for what we’re calling unsecured financing. From a lender’s perspective, collateral provides a way to mitigate the risk of default because they can liquidate your asset to recoup some of their loss if you are unable to meet your loan obligations. Additionally, the often week’s long process to evaluate your loan application at the local bank gives them more time to evaluate your creditworthiness in an effort to also mitigate risk. You can think of the costs associated with an unsecured loan as one of the ways these lenders mitigate the risk they’re assuming by offering an easy application, a quick response, and not requiring collateral.
Borrowing always has costs associated with it, regardless of where you borrow. Because unsecured financing is often short-term financing, the periodic payments will likely be higher and more frequent than a comparable longer-term loan secured with collateral, it will be important to make sure you have the cash flow to support the periodic payments. The benefit of these shorter-term loans will be that the accrued interest will likely be lower, making the overall dollar cost of the loan much less than the longer-term version of the loan.
3. Minimum Qualifications for Unsecured Business Loans
Because many lenders don’t share the same qualification criteria with their peers, you can’t expect they will all be the same. You don’t want to waste time applying for unsecured business loans for which you won’t qualify.
How can you know what lenders want? Here are a few of the basic requirements.
- A good to excellent personal credit score – Although most traditional lenders will want to see a personal credit score in the 700s as a minimum, there are many lenders that will work with a business owner who has a personal score in the 600s, provided they can otherwise show a healthy business and a cash flow that will support loan payments. There are even some who will accept a personal score lower than that—but you should expect to pay a higher interest rate or increased fees.
- An established and acceptable business credit history – Lenders are trying to evaluate what you will do in the future based upon what you have done in the past. That’s why they look at your business credit history and why it so difficult for very early stage businesses to access borrowed capital. Fortunately, you don’t have to have several years in business to qualify for a business loan, many of the lenders who offer what is called unsecured financing with work with most businesses if they have a track record, or business credit history, of only a year.
- Business history – Two years’ demonstrated business activity is what most traditional lenders state as their minimum to qualify, but some financial products may be a bit more flexible. Loans marketed specifically to younger businesses, for example, could rely on sales figures or cash flow reports as an indication that things are going well for you.
- Your sales – If you only made $25,000 last year, you can forget about a $50,000 loan. Banks will only give you a percentage of what you earned, so the less you made in the past two years, the smaller your loan amount will be. This isn’t just a bank-specific guideline, either; SBA loans, for example, only guarantee a certain amount of your loan, so lenders won’t want to stick their neck out for a company that hasn’t brought in a significant amount over the value of the loan. Most lenders will want to see annual revenue of at least $100,000.
Each lender will have its own internal standards, however, and the approval process can be a bit nuanced. In the end, the decision to give you a loan will come down to the each lender’s individual processes. If you have worked with a lender in the past, there are some lenders that offer reduced fees and maybe even lower interest rates as a reward for you loyalty.
4. Prepare your application materials and documentation
While the previous three steps may seem involved, preparing the paperwork for the loan is the part most people dread. The upside is that, if you tackle it early (and before you apply), you can avoid surprises and help speed the process along. It’s possible for many lenders to provide you with an answer on your loan application on the day you apply with most online banks and no more than a few weeks for lenders that are working with the Small Business Administration.
The time it takes from application to approval of unsecured business financing is counted from the time a small business owner puts in a completed application; missing information will only delay your funds. It’s important to get this part right. Prepare the following for the smoothest app possible:
- Time in business – This will be documented by your articles of incorporation, tax returns, and other filings.
- Industry type – Not all loans are available to all industries.
- Business plan – You should already have one of these, so dust it off and check it for relevancy.
- Uncollected invoices – Also known as “outstanding AR (accounts receivable), this can help demonstrate the money you’ll be getting in the short-term to help pay down the loan.
- Various business reports and financial data sheets, including Profit and loss statements, Cash flow forecasts, Balance sheet, and Asset lists. (While you’re looking for an unsecured loan, showing you have assets can help prove the net worth of your business and get you access to additional funding.)
- Personal tax returns
- List of all your debts and payments due (also called a “debt schedule”)
- Personal and business bank accounts, with most up-to-date balances
- Documentation of other business debts paid satisfactorily
- Plan for how you will specifically use the funding (working capital or debt refinancing, for example)
- How your budget will look during the repayment period
Not all loans will ask for all this info – especially for certain short-term loans from online lenders.
Most online lenders will want to see:
- Your business license
- A business checking account
- Your Federal Tax ID number
- Your annual revenues
- Your personal credit score and business credit history
- 3 months of bank statements
By having it ready, you’re prepared for whatever the bank asks of you. It’s better to be safe than sorry, and this is all the information that you should have readily available anyway.
Frequently Asked Questions
While the steps above will get you through the process of most business loans, there are some unique questions business owners often have when completing their application. Here are the most common inquiries and answers.
How can I qualify for the best unsecured business loans rates?
The lender will look at a number of factors, including your time in business, your annual revenue, and your personal credit history and business credit profiles. Building and maintaining a strong personal and business credit history is the first step.
Just a few points can be the difference between premium rates and something that will make your monthly payments unaffordable. If your score is less than desirable, consider holding off on getting a loan until you’ve hit the good to excellent credit range. The better your score, the less likely the lender will be to look to your personal assets or business assets as collateral.
A strong credit profile might not be a guarantee that you’ll qualify for a loan, but it will increase the number of options you will have to choose from.
Are there separate unsecured business loans for startups?
Depending on your definition of a startup, the products available to you will vary. A true startup that has no proven revenue and gives lenders little history to go on will have a harder time getting an unsecured business loan. They do exist but expect the loan amounts to be much smaller than what established companies can borrow. Many of these loans are marketed as “microloans,” and private financiers – as well as preferred lenders through the SBA – have a variety of loans just for this demographic of businesses.
Is it possible to get unsecured business loans with bad credit scores?
As a general rule, business loans are difficult to get if you have bad or no credit. If they are made available to you, expect them to be a secured loan (if you’re borrowing from a traditional lender like the bank) – requiring collateral of either personal or business assets. If you are borrowing from a non-traditional lender like an online or alternative lender, you should expect to pay much higher interest rates. You do have some options, however, and should consider talking to more than one lender before abandoning your search.
The cash from these personal loans can be used for your business and can help you establish good credit through on-time repayment that can then help you get unsecured small business loans in the future. Building your credit score should always be a top priority for anyone looking to finance their business – whether it be through personal or business loans, a credit card, or other business financing.
Will I qualify for unsecured business loans with no personal guarantee?
Most lenders today, both traditional lenders and online lenders will require a personal guarantee except for all but the most established and creditworthy borrowers. In most cases, you should expect a personal guarantee to be required.
If you happen to have a robust enough business to guarantee it on the sales performance of the company, alone, it’s possible to get an unsecured business loan with no personal guarantee. Just don’t expect it to be as large as a secured business loan. You will still be expected to provide some personal information on the application.