How to Apply for Unsecured Business Loans

How to Apply for Unsecured Business Loans

How to Apply for Unsecured Business Loans

Getting funding for your business is a significant growth milestone. With so many options for lending, however, it can be challenging to know what choice is best. For many business owners, the unsecured route presents the least amount of risk. With no collateral to offer up, you can be assured that your home and other assets are safe. 

How can you make sure you have a good chance at the best unsecured business loans? Start with this step-by-step guide:

  1. Understand how the application process works.
  2. Determine the best lender or funding type for your needs.
  3. Get pre-qualification information and ensure you meet requirements.
  4. Prepare your application materials and documentation.

As you can see, there are more than a few things you can do before you ever fill out that first application. Applying for an unsecured business loan offers the benefit of not having to put up your own assets as collateral, but it also requires you to be sure that you meet the often-higher qualifications and can repay the fees and higher interest rates.

Here is a bit more about each step, so you can work through them before you meet with the lender or apply online, making the funding process much less stressful:

1. Understand how the application process works

Business loans are not something to jump into blindly, and using this guide is a good first step in preparing for the often-lengthy process. You should also get a feel for what lenders want in borrowers, along with how long certain loan products can take for application, approval, and funds disbursement.

If you are looking for a quick-cash solutions, for example, many of the lenders out there won’t be a good fit. Your current business model, along with your preference of online vs. in-person banking will affect what the process “looks like” from the first contact to cash out.

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 what is asked of me?
  • How is my credit score and credit history?
  • Do I want to do the application online or in person?
  • What loan amount do I need to make it worth my while? What is the ideal amount?
  • Is there a type of loan that I’m not open to obtaining?
  • Will I be subject to a blanket lien, even if I don’t offer up specific collateral to the lender?

Having these questions answered ahead of time can help you through the next step.

2. Determine the best lender or loan type for your needs

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. While traditional business loans are what most borrowers think of, some personal loans may fit your needs just fine – especially if you only need a few thousand dollars or need money for a few months, at the most. 

How long do you need to pay back the loan? Some short-term business loans, including vendor or merchant financing, are an option that won’t require collateral in most cases but need paying back within weeks or months. Standard SBA loans, on the other hand, give you up to 10 or more years for repayment. 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 may have the strictest repayment terms, of all. 

What interest rate are you comfortable with paying? Those fast-cash loans will cost you 25% or more in interest per year, and some can cost even more than that! If you want the benefits of a low or fixed-rate loan, plan out what you are willing to spend each year. If applicable, factor in extra for closing costs and the various inspections and paperwork needed for real estate, as well. 

Finally, you may decide on a loan based solely on your monthly payment amount. This is a wise move for anyone who is getting funding to solve budgetary woes, such as refinancing high-interest debt or paying off delinquent taxes. Keep in mind that even the smallest loan payments will add a burden to your operating expenses. Don’t borrow if you can’t afford to pay it back.

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3. Get pre-qualification information and ensure you meet requirements

If you’re used to getting offers for business credit cards in the mail, it may seem that business loans might provide the same pre-qualification process. Unfortunately, many business loans aren’t as forthcoming with what they want from borrowers, and the more attractive loans aren’t going to come to you.

You’ll have to do your share of research to see what loans meet your standards mentioned above, as well as which are likely to approve you. 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 very good to excellent personal credit score and demonstrated credit history – Expect to walk into the application with a 680 or higher. If you really want to get a loan with no collateral, you should aim for the very good to excellent range (between 740 and 850.)
  • An established and acceptable business credit score – If you’ve not been in business long, you may not have any business credit profile. This could be problematic, but not impossible for getting that loan. If your business score is lacking, be prepared to lean on that very good to excellent personal score.  
  • Business history – Two years’ demonstrated business activity is what most lenders state as their minimum to qualify, but some financial products may be a bit more flexible. Loans marketed specifically to startups, 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 small your loan amount will be. This isn’t just a bank-specific guideline, either; the 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. 

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 may come down to the lender’s confidential processes. If you already do business with a bank, for your credit card processing or payroll, there is a chance they could be more lenient about some requirements or open one of their unsecured business lines for you to borrow against. Many businesses start with the lenders they already work with for this reason. 

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 within a couple of days for some 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 small business owners put 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. 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. Perhaps the best way to ensure those lower rates are available to you is to keep your credit scores high.

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 very good to excellent credit rating. The better your score, the less likely the lender will be to look to your personal assets or business assets as collateral.

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 secured loans – requiring collateral of either personal or business assets. You do have some options, however, and should consider looking into personal unsecured loans.

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?

The lender needs to know that you can pay back the funding as agreed, and most will want some form of personal guarantee. There are a few loans available for those with very high revenues and established business credit score, however.

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 with your own assets. Just don’t expect it to be as large as some secured business loans. You will still be expected to provide some personal information on the application.

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This article was originally written on July 22, 2019 and updated on June 30, 2020.

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Linsey Knerl

Linsey Knerl

Linsey Knerl is a Midwest-based author, public speaker and member of the ASJA. She has a passion for helping consumers and small business owners do more with their resources through awareness of the latest financial and tech services.

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