Businesses, including startups and small and medium enterprises (SMEs), sometimes rely on unsecured financing to foster growth. One of the biggest reasons is that business owners do not need to offer any collateral for this loan. Furthermore, flexible tenures, straightforward documentation, quick approval, and low-interest rates are other significant reasons for the increasing popularity of unsecured loans.

What are Unsecured Business Loans, and How to Apply?

The application process may vary depending on the financial institution; it is still essential to look at the fundamentals of unsecured business loans, eligibility, and necessary documentation.

What are the Advantages of an Unsecured Business Loan?

Several small businesses earn excellent profits, but lack assets lenders accept as collateral. One of the most significant advantages of an unsecured business loan is that borrowers can immediately obtain funds without the hassle of extensive and lengthy paperwork. It will only generally require legitimate proof that your business exists, credit history, and cash flow statements.

While this type of loan may require a higher interest rate than an SBA-guaranteed loan or a traditional bank loan, it also has distinct and reasonable advantages compared to its conventional counterparts.

  • The approval of unsecured loans is based on the business’s financial strength and the borrower’s credit profile and history. They do not depend on whether or not the borrower has sufficient assets as collateral.
  • The application process is straightforward and streamlined so that funds can be made ready as soon as 24 hours. Businesses seeking urgent funding opt for an unsecured loan to scale up the business. Business owners find these loans an excellent opportunity to maintain long-term profitability.
  • Collateral is unnecessary for unsecured business loans, making the approval faster and more efficient. It helps business owners derive maximum profits and benefits in favorable market conditions.
  • The loan’s terms and conditions are formulated to fit the needs of the business.

For several SMEs, the accessibility to quickly borrow without the need to present any estate or other assets as collateral is attractive.

What are the Potential Risks of an Unsecured Business Loan?

These debts might be short-term with varying terms, but common risks accompany various elements of this kind of loan.

Interest rate

Lenders consider unsecured loans a riskier option than a secured business loan, which clearly explains its higher interest rate. They must also ensure a clear part to regain from possible losses if the borrower’s business fails to repay them.

Qualifying for a loan can be a handful for some.

This especially applies to business owners with lower credit scores which have higher probabilities of struggling to qualify for unsecured business loans.

The amounts are often smaller.

In most cases, lenders might not willingly approve huge amounts of money due to this kind of loan’s risk. Unsecured business loans are ideal for short-term financial transactions.

Who Can Get an Unsecured Loan?

If you think the unsecured loan is for you, it basically depends on your financial situation and your purpose for getting a loan. In most cases, you can consider opting for an unsecured loan when you:

  • Plan for a large business purchase
  • Have a good credit history
  • Have a reliable income
  • Apply for a new loan to pay off your other liabilities (consolidating debt)

How Does an Unsecured Loan Work?

A business loan is not something to immediately jump into blindly. As borrowers, this guide will take you through the loan application process. You must also get an idea of what a lender looks for in prospective borrowers, together with the application duration, approval, and disbursement of funds.

Understand the application process

Several conventional lenders would probably not be a good fit if you are looking for a quick access solution aside from a business credit card. Most online lenders like the New York Tribeca Group offer a one-page page and straightforward online application, an immediate answer to a loan request, and fund access in just a matter of days.

To prepare yourself for a lending cycle, you can consider the following points:

  • The ideal amount of money you need to fill your business need
  • The financial records that might be asked from you during the application process
  • Your business credit history and credit score
  • Evaluate if you prefer an in-person or online loan application
  • Types of loans that you might be interested in

Considering these factors will prepare you for the next step.

Kinds of Unsecured Business Loan Financing

When deciding on turning to an unsecured loan to fund your business, it’s time to consider various types of funding that belong to this category.
How long will it take for the borrower to pay back the loan? There are short-term business loans, like merchant or vendor financing, that approve loans without the need for any collateral. However, they will require payments in weeks or months in most cases. A standard SBA loan gives borrowers up to ten years or more for repayments, but in this case, it typically requires collateral like any property you have. On the other hand, cash advance funding will need a regular automatic debit from the borrower’s business bank account.

Since unsecured business loans often mean short-term financing, the payments are likely more frequent and higher than long-term loans with collateral, as borrowers under this kind of loan must ensure a consistent cash flow to support these periodic payments. Accrued interest from a short-term loan is often lower, turning the overall cost of the loan much lesser than that of a long-term loan.

Essential qualifications for an Unsecured Business Loan

Different lenders might have other requirements in getting an unsecured business loan. Here are some essential requirements that they might need from borrowers.

  • A good credit score. In most cases, lenders want to see a borrower’s credit score in the 700s, which they consider the minimum. On the flip side, lenders can work with business owners with credit scores in the 600s, but they have to guarantee a healthy business and cash flows that support their payments. Some accept credit scores lower than the minimum but will have to implement increased fees or higher interest rates.
  • An established business credit history. Lenders will evaluate the business’s future endeavors based on its past track record. This is why they need to look at the borrower’s credit history first and assess if it meets their standards. Fortunately, the business does not have to operate for several years to qualify for a loan. Several lenders can work with companies with a credit history and business track record of at least a year.
  • Business history. A business that fully operates for at least two years is what most lenders implement as a minimum to qualify; however, they can also be flexible enough to lower the minimum requirement. Younger businesses can rely on cash flows and sales figures to prove that they are performing well.
  • Sales. The higher the business owner’s annual revenue, the better it is to get a higher amount from unsecured business loans.

Every lender will have its internal standards; hence the approval will depend on its application processes. Lenders who have consistently worked with borrowers can offer reduced fees and probably lower interest rates for the borrower’s loyalty.

Prepare the application materials and other documentation.

Preparing the paperwork for a loan application might be one of the most taxing steps. However, preparing the requirements early will avoid any surprises and help speed up the application process. Some lenders can even provide verdicts on a loan application within the day of the application.

Missing requirements will only delay the release of funds; hence it is essential to fulfilling the following papers for the seamless application possible:

  • Business plan
  • Outstanding ARs or uncollected invoices
  • Industry type
  • Time in business
  • Personal tax returns
  • Debt schedule
  • Company and personal bank accounts, with the most updated balances
  • Proof of other business debts which are paid satisfactorily
  • Specific plan and purpose for the funding
  • Profit and loss statements, balance sheets, forecast on cash flows, asset lists
  • Your budget for the repayment duration
  • Business license
  • Annual revenues
  • Business’s credit history and personal credit score
  • Business checking account
  • Bank statements for three months
  • Federal Tax identification number

What Are the Reasons Why Unsecured Business Loan Gets Rejected?

One of the excellent approaches for business owners to avoid loan rejection is to identify and understand the characteristics of what lenders usually view as red flags.

Bad Credit History

The business owner’s credit profile provides lenders insight into the owner’s payment history and how one handles the finances. If the borrower missed payments, has various maxed-out credit cards, or defaulted on loans, it can lower the FICO score. For this reason, lenders may affect how they view borrowers.

Paying bills on time, keeping low credit balances, and opening only credit cards for a specific intended purpose will help borrowers are some factors to improve one’s credit score.

Inconsistencies in cash flows

Lenders positively consider loan approval if businesses have less money going out and more money coming in. Inconsistencies in cash flow are reasons why loans get denied. Lenders must also ensure that the borrower’s business generates enough money to cover the repayments. If the financial statistics present a negative cash flow, lenders may have found it suspicious and might signify what’s ahead for the borrower’s business.

Recent bankruptcy

Bankruptcy is a sign of insufficient cash flow and is one of the primary reasons a loan gets denied. Going into bankruptcy is a frequent rationale for a lender to deny applications, whether professionally or personally. Reduced sales and customer volume, inability to make payments for essential services and unexpected costs that are few to absorb are a few reasons small businesses file for bankruptcy.

Lenders view business bankruptcy as a red flag. However, remember that it does not directly mean the business owner will be shut off from borrowing money forever. Suppose the owner has filed for bankruptcy; they should immediately focus on improving credit profiles while waiting for the bankruptcy record to be removed from the reports.

The business is still young.

Having a newly-opened business is one of the reasons why loans get rejected, as lenders usually base their decisions on the company’s financial performance history. Lenders might also look at how long a business will survive. Based on the most recent statistics from the SBA, new businesses’ survival rate after a year is at around eighty percent.

Invalid or insufficient documents

No matter how excellent the borrower’s credit score, how substantial the business’s revenue is, or how long the company has been running, lenders will have a more challenging time approving the loan if you provide incomplete or inaccurate documents. It is essential to go over every document before handing it to the lender for a loan application to avoid wasting time and damaging the borrower’s credit score.

Applying with wrong lenders

Like doing some research in opening a business, getting an unsecured loan entails extensive review when looking for the right lender. Each financial institution has various criteria when it comes to offering funding solutions. Falling into wrong lenders might jeopardize the borrower’s business instead of helping it grow.

FAQs about Unsecured Business Loans

The comprehensive discussion above sure is constructive for business owners to have enough background on unsecured business loans. However, here are some essential questions that might also help both lenders and borrowers:

How long will the loan application take until it gets approved?

Our financing company provides financial solutions through an easy and quick application process. Borrowers can fill out a form via the website in five minutes; the evaluation will start immediately after submitting the application. No required collateral means minimal paperwork when applying for an unsecured business loan. This means that borrowers will know the approval of the loan application in just a matter of hours.

Is it possible to pay off the loan earlier than scheduled?

In general, borrowers are allowed to pay off the loan earlier. However, lenders may dissuade them from doing so for reasonable points. One can opt to pay back the rest of the principal amount but will still incur charges for the interests of the term. Some lenders require borrowers to have a lock-in period.

It would still be best to remain with the repayment conditions and schedule to avoid possible unnecessary charges. Following the terms and conditions of the loan can help improve the borrower-lender relationship that will be beneficial for the subsequent financial transactions in the future.

Are there unsecured business loans designed solely for startups?

The definition of startup varies; hence the financial solutions and products will also vary. A startup that has yet to prove its worth in the corporate world, providing lenders with little business history, will probably have a more challenging time approving an unsecured business loan. If lenders offer loans to startups, one can expect that the amount will be much smaller than what established businesses can loan.

How about getting an unsecured business loan with a poor credit score?

Generally, unsecured business loans are hard to get if the borrower has no credit or a poor credit score. If loans are offered to a borrower, they might usually require collaterals of personal or business assets. Suppose one borrows from non-conventional lenders like an online lender; it should be expected to involve higher interest rates.

It is still a case-to-case basis, and talking to a lender before abandoning the loan application can be beneficial. The cash obtained from a personal loan can be used for the business that will eventually help the business owner establish good credit by on-time repayments that can propel to getting unsecured business loans in the future.

Will the borrower qualify for an unsecured business loan without a personal guarantee?

In most cases, online and traditional lenders will ask for a personal guarantee except for those creditworthy and established borrowers. This is why, before trying to apply for a loan application, it would be ideal to have a personal guarantee.

On the other hand, if the business has been thriving for a long time and can rely solely on its sales performance, it is possible to get approved on an unsecured business loan without a personal guarantee. Still, it will not be as large as expected. Lenders will still ask for personal information and necessary documents upon application with or without a personal guarantee.

Final Thoughts

Your business will greatly benefit from an unsecured loan, despite the risks that come with it. Suppose your company looks to expand your market or maintain a healthy and positive working capital; there is a vast range of loan products that you can choose from. It is just a matter of picking the right financial solution provider that can help nurture your business’ growth.

Understand Your Options

Find out more about the different finance opportunities available in your area and get funded today!

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