- Unsecured business loans defined
- Secured vs. unsecured business loans
- Types of Unsecured business loans
- How does it work?
- Qualification for unsecured business loans
- The essential documents when applying for an unsecured business loan
- Where to get an unsecured business loan?
- Scenarios where unsecured business loans are necessary
- The benefits
- The potential risks
- The reasons unsecured business loans get rejected
- Choosing the best unsecured business loan
- Tips to prevent costly mistakes with an unsecured business loan
- Misconceptions about unsecured business loans
A company’s growth depends on the constant cash flow that may also be necessary to fulfill orders, purchase equipment, expand the business, or pay for the workforce. For large firms, these aspects can be easier to fund.
Unsecured Business Loans
However, small businesses might have difficulties getting funding without collateral. In these situations, small business owners borrow money from banks and other financial service providers in business loans.
Unsecured business loans are ideal funding service options for companies with lesser assets, those that prefer not to offer collateral or businesses that are potentially growing fast and need quick access to cash.
Unsecured business loans defined
Those who choose unsecured business loans are businesses that do not want to undergo the hassle of providing collateral. Since no assets are involved in this type of loan, the lender will ultimately need the borrower to have a good credit score. In most cases, the approval and funding amount will depend on the credit rating.
Since an unsecured business loan better benefits the borrower, lenders usually impose higher interest rates than those loans backed up by collateral. The apparent risk involved in an unsecured business loan typically means lenders will offer them as a short-term loan to reduce the risk to lenders. While most lenders do not require collateral for unsecured business loans, some might ask for a personal guarantee. This means that lenders can appropriate the borrower’s assets if businesses default on the loan.
Secured vs. unsecured business loans
A secured business loan is one of the most straightforward and common lending choices. They are backed by personal or business assets like equipment or real estate. Suppose the borrower defaults on the loan, the lender will assume ownership of the property and may sell it to recoup the loss. A few of the collateral involved in this kind of loan include unpaid invoices, personal cash, inventory, equipment, and real estate, among others.
One of the more significant differences between a secured and unsecured loan is collateral. Most unsecured loans come with precise qualification standards and higher interest rates. Also, if you choose to get a loan from banks, they might require other security features as alternatives to collateral. This can include a percentage of the business’s credit card transactions.
Types of Unsecured business loans
Depending on the financial institution or lender, an unsecured business loan comes in various types. Here are some of them:
- The term loans typically provide a lump sum funding that borrowers need to pay back over an agreed timeline with a definite payment schedule. This type of unsecured loan is available but can be challenging for small businesses and startups because of more significant amounts in repayments.
- With a business line of credit, lenders approve borrowers with a revolving line of credit similar to that of credit cards. There is a maximum limit a business can borrow, and lenders will apply interest only for the cash used. Lines of credit are ideal for filling in cash flow gaps or growing your business.
- Another option for businesses struggling with cash flow is invoice financing. Companies can sell their unpaid invoices to lenders at a discount, usually approximately 80% of the invoices’ worth. The lenders will collect payment from customers for the total value. While this unsecured loan is easy to secure, the fees quickly add up.
- Merchant cash advances provide quick access to cash with a single sum of money for a percentage of the borrower’s forecasted sales. They will repay the advance, including any fees, using either a part of the future credit and debit card sales or fixed regular transfers from their business bank accounts.
How does it work?
Unsecured business loans function similarly to any other loans in the market today. Businesses get funding for working capital, and they need to repay the amount over an agreed period. Meanwhile, lenders typically impose a fixed rate on interests. Furthermore, borrowers can also expect additional charges, like a fee for arranging the loan, which can be added to the loan. In almost all cases, the loan is given to the borrower up-front upon the approval of the loan application.
Also, you might want to consider these factors before qualifying for that loan.
- The amount of money you need to fulfill your business needs
- Financial records
- The business’ credit score and credit history
- Assess if you prefer an online or an in-person loan application
- The different kinds of unsecured business loans which interest you
Qualification for unsecured business loans
Each lender has its requirements, and not all of them impose similar terms and conditions. Here are essential aspects borrowers need to note before applying for unsecured business loans.
An excellent credit score
Since there is no collateral in an unsecured business loan, lenders will typically look at the borrower’s credit score. This way, lenders can evaluate the business’s repayment capability. While financing companies require a minimum credit score, some can accommodate below the expected score for this type of loan. However, as a borrower, you need to remember that a lower credit score means increased fees and higher interest rates.
Established credit history
Your business’ credit track record also needs to be good. This will be one of the factors lenders will check to see if you qualify for the loan. They usually look at your credit history and assess if the record meets the standards. The good thing is that your business needs not to be operating for long to qualify. In most cases, financing institutions can work with companies with a record of at least one year.
Any lender would always see the borrower’s business history as one of the main aspects of qualifying for a loan. Some require businesses to have at least two years in operation. However, they can also be flexible to accommodate startups. Younger companies can rely on sales figures and cash flow to prove their excellent performance.
Borrowers with higher annual revenue on their business typically get a higher amount when applying for an unsecured business loan. Some base their ideal loan amount on these criteria.
The essential documents when applying for an unsecured business loan
Some lenders require extensive sets of requirements. Meanwhile, others will only need a few documents when applying for a loan. Regardless, getting these documents together can be taxing. This is why it pays to know the specific documents needed before meeting with the lender with your lender. Preparing them early will prevent surprises and help speed up the loan process. In some cases, financing institutions can give verdicts as fast as one day. Lacking requirements will only delay the release of the funds. Hence fulfilling the essential documents will ensure a seamless loan application process.
Below is a list of documents most lenders need when applying for a loan. While not all of them below apply to all lenders, it still pays to be familiar with these documents.
- Time in business
- Industry type
- Business plan
- Debt schedule
- Uncollected invoices
- Outstanding Accounts Receivables
- Personal tax returns
- Annual revenues
- Business license
- Budget for the payment duration
- Federal tax identification number
- Business checking account
- Personal and business credit score
- Business and personal bank accounts with updated balances
- The specific purpose of the funding
- Business credit history
- Balance sheets, asset list, profit and loss statements, and cash flow forecast
Where to get an unsecured business loan?
Borrowers can also choose where to approach for unsecured business loans. In most cases, businesses turn to banks for funding. However, there are other funding sources where they can go for these kinds of loans.
- Alternative lenders bridged the gap left by banking institutions regarding unsecured loans. Since getting loans from banks can be difficult and time-consuming, these alternative lenders created more innovative solutions for borrowing money. Booster Financial, for one, is an alternative lender which allows businesses to process their loans online. They can analyze your business data and process and approve applications within a day. The immediate funds can boost your capital for your business.
- Borrowers might also want to check with the government if they can apply for unsecured business loans.
- As for any funding needs, banks will always be one that businesses go to get a loan. However, as you may know, some companies find this option hard to qualify for. A few of the reasons include the number of requirements needed and the application process timeline being more extended.
- Peer-to-peer lenders are also another option for unsecured business loans. The rate and fees are somewhat similar to that of an online lender. Borrowers also need to watch out for other fees attached to the loan. Regardless, they are quicker to arrange. However, you need to assess the potential risks when opting for this unsecured business loan lender.
Scenarios where unsecured business loans are necessary
Among the essential factors in deciding whether to secure an unsecured business loan is the purpose of your funding. How are you going to make use of the cash? What is it for? Here are scenarios that depict which can prompt you to apply for a loan.
There are situations when you want to open a new branch in another city, introduce a new product line, or move to a bigger office. These would need significant investment. With this, you can choose to get an unsecured business loan to have quick access to funding. Additionally, some lenders do not require you to have a high credit score to get the loan.
With expansion comes a potential increase in production. Of course, you need to have machines with better technology to reduce production costs, boost time efficiency, and improve product quality. These pieces of equipment are expensive, and some need to be imported. Consequently, you can turn to unsecured business loans to finance the purchase, as these loans are typically within days.
This usually applies to seasonal businesses. A good example is an apparel. These products generally sell more in the festive seasons. However, your business cannot depend on demand for how you produce your products. There needs to be a stock when the market request rises. With continuous production, even in the off-season, you need funding to procure raw materials. An unsecured business loan can play an essential role here, so your business can stay prepared for the spike in demand.
Addressing marketing expenses
Your extensive product line will be useless if your company does not market them correctly. Product visibility is essential to widen the customer base. Unsecured business loans can help your business promote your brand. Marketing strategies such as TV commercials, print ads, social media ads, and outdoor advertising require a good amount of cash. As this type of loan can be disbursed in days, you can immediately fund campaign ads.
Unforeseen circumstances will always be present in any organization or company. Business owners need to ensure contingency plans in case of emergencies. Unsecured business loans can cover financial hardships due to unexpected situations since these loans promote ease of application and faster fund disbursement.
Extra working capital
Besides product manufacturing, your business needs to clear bills like rent, water and electricity bills, payroll, and paying the suppliers. All these can be managed with a positive cash flow. However, suppose you currently have an inconsistent cash flow, you can turn to an unsecured business loan to ensure consistency in business operations.
Shorter application process
The processes of business loan applications can be extensive. Financial institutions need to ensure they lend the money to borrowers that can religiously adhere to repayment schedules and pay their debts in full. In both secured and unsecured loans, lenders thoroughly examine every application. Lenders also have to assess borrowers’ collateral, which can be time-consuming.
There is no collateral involved in most cases with unsecured business loans, so there’s no need for lengthy evaluation. Instead, lenders focus on the business credit report, time in business, and monthly sales. The streamlined process will result in the disbursement of funds often as early as 24 hours from application submission. Also, most companies need the funding sooner rather than later. With this, an unsecured business loan is usually the better option.
There is no collateral needed.
Not all businesses have collateral. In most cases, startups may not have the valuable business assets to offer to lenders. This will lead to younger companies being ineligible for most of the secured financing opportunities. However, unsecured loans do not need collateral. Instead, lenders review a borrower’s market opportunities and business plan. With this, startups and companies lacking collateral can still meet unsecured business loan requirements. Since there’s no collateral, lenders might require borrowers a personal guarantee. It’s a legal document providing the lender the right to pursue the borrower’s personal asset in case they default on the loan.
There’s no risk of losing collateral.
Unlike secured business loans, where borrowers lose the collateral in case they default on the loan, an unsecured business loan lender needs the help of the court. In case the borrower under an unsecured business loan fails to repay the loan, the lender can secure an order to seize properties. Furthermore, lenders might be authorized the seizure of property to recoup losses on loans. When the borrower’s business declares bankruptcy, the court can discharge the unsecured business loan.
The potential risks
Higher interest rates
An unsecured business loan brings many risks for lenders. For secure business loans, lenders have a clear path to recouping losses in case of loan default. With unsecured business loans, financial institutions do not have collateral with which they can assume ownership. As a result, lenders will impose higher interest rates. Before committing to a loan, talk to your lender about how high the interest rate can go to set proper expectations.
It can sometimes be harder to qualify.
Without collateral, a lender will look closer at some aspects of the borrower’s business, including credit score, financial statements, business plans, and cash flow projections. Since unsecured business loan lenders will also aim to minimize risks, those borrowers with lower credit scores might struggle to qualify for the loan. Moreover, if you have a poor credit score or have a new business, it might be beneficial to explore more lenders who can accommodate your current standing.
Loan amounts are often the same
Some lenders offering unsecured business loans might provide only small amounts. Due to the increased risk under this type of loan, financing institutions are less willing to provide large amounts of cash. Additionally, unsecured business loans are ideal for businesses that need short-term funding but cannot make more extensive investments.
The reasons unsecured business loans get rejected
You might be wondering what’s with your loan application that fails to get the nod from lenders. Here are a few aspects why some application gets rejected:
Poor Credit History
The borrower’s business credit history will provide insights into their payment history and how they handle business finances. Suppose they miss payments, default on loans, or have several maxed-out credit cards; these can lower their credit rating. As a result, this poor management will affect how lenders view borrowers. Maintaining lower credit balances, on-time bill payments, and opening credit cards only for a specific purpose will help borrowers improve their credit scores.
If a business files for bankruptcy, it signals to lenders of having insufficient cash flow. As a result, this will be one of the reasons the loan gets rejected. Whether professionally or personally, going into bankruptcy pushes a lender to deny applications. Poor sales, reduced customer volume, inability to make payments on essential services, and other costs are a few reasons why businesses file for bankruptcy.
Remember that bankruptcy is a red flag for lenders. However, it will not directly mean that they will completely shut off borrowers from borrowing money. As business owners who file for bankruptcy, you should immediately work on improving credit profiles while waiting for the removal of your bankruptcy records.
Inconsistent cash flows
Lenders might also deny unsecured business loan applications due to unsteady cash flow. They usually consider approval on businesses with less money going out and more money coming in. Surely, financing institutions must ensure that your business can generate enough cash to cover repayments. Upon reviewing the business’s cash flow and it turns negative, lenders will find it suspicious and might doubt the future revenue capabilities of the borrower’s business.
In most cases, startups might need to face loan rejections as lenders usually base their assessment and decisions on the business’s financial history. They might also evaluate how long a company will survive.
Invalid and insufficient papers
An excellent credit score, outstanding revenue, and established company will not guarantee a loan approval if documents are invalid and lacking. Lenders will always base their loan approval on documents; hence borrowers should ensure they are valid and complete. It is vital to review and go over the document several times before submitting them to the lender. With this, you save much time and avoid damaging your credit score.
Choosing the wrong lenders
There’s a reason why business owners need to shop for lenders first committing to one. This is to know which lender can accommodate your financing needs accordingly. Every financing institution implements various requirements and criteria. Partnering with the wrong lenders might jeopardize your business instead of helping it grow and expand its market reach.
Choosing the best unsecured business loan
So how are you going to select the best unsecured business loan? There are a few things you need to pay attention to. See the list below:
To save time applying for loans, ensure the lender you chose is compatible with your funding needs. Eligibility requirements like the minimum credit score, minimum time in business, and minimum annual revenue are a few of them. These fundamental requirements will determine if lenders will likely approve loans for you.
Unsecured loan options
Under the unsecured business, loan are various loan types. You can narrow your search to a few lenders offering the kind of loan you are looking for. Also, remember that you need to identify the ideal amount you need. From there, find a lender offering your desired loan limits. Finally, look into the repayment periods and payment frequencies for term length.
Loans that relatively cost less can be beneficial for your business. Carefully review the down payment, interest rate, origination fees, and additional fees before committing to a lender for an unsecured business loan.
Getting a loan also serves as your business’s investment. With this, you also need to trust your lender. Watch out for online scammers, as they can jeopardize your business. Take note that legit lenders must look at your documents and credit history during the loan application process. If they do not, then it’s already a red flag. Also, you can check with a credible institution to check if the lender you chose is authorized to make loan transactions.
Tips to prevent costly mistakes with an unsecured business loan
Similar to opening up a business, you also need to plan out ways to have a seamless unsecured business loan transaction – from the application, repayments, and until fully paying the debt. Mistakes during the loan term can be costly for you and your business.
Create a comprehensive business plan
In most cases, lenders will review your business’s strengths and weaknesses, bank account statements, revenue projections, profit margins, and credit trade lines with other companies. You will have higher chances of securing any business loan type with a thorough business plan.
Ensure your personal finance is in place
Owners of small businesses need to ensure that personal finances are always available and in place. When lenders consider you for an unsecured business loan, this can also come into play.
Check your credit
Assess your personal and business credit scores and improve them before applying for a loan.
Decide on how you will use the money.
The type of loan and the duration must coincide with the loan’s purpose. For example, unsecured business lines of credit are ideal for small businesses that need capital for short-term expenses like payroll.
Weigh the possibilities
Before committing to any unsecured business loan, weigh the benefits against the costs. While these loans do not need collateral, they are relatively more costly with higher interests and personal guarantees.
Consider all alternatives
It pays to look outside the loans you are eyeing to get one. This way, you can compare their benefits and identify which among the loans your business can potentially benefit from.
Misconceptions about unsecured business loans
Sure, you heard and read all the necessary things about unsecured business loans. However, you can only prove if they’re true or made up once you experience getting a loan from this type of financing option. Those you found not true are myths about an unsecured business loan.
Startups cannot get an unsecured business loan
Surely, established businesses can quickly get a loan based on their financial history. However, it does not necessarily rule out the possibility of lenders granting loans to younger firms. Lines of credit and small business loans can be available for startups.
Borrowers need to have a perfect credit history
An excellent credit history gives borrowers a higher chance of getting a loan. However, one does not need a perfect credit history to qualify and get a loan. Also, credit history requirements will vary depending on the lender.
Banks are the sole provider of unsecured business loans
Back in the day, it is true that banks were the only means of obtaining business funds. However, a large number of financing institutions are also playing in the market today. Alternative and online lenders like Booster Financial provided businesses denied by traditional banks with straightforward and fast financing options.
An unsecured business loan is for small businesses only
There is a presumption that unsecured business loans only deal with small amounts and solely accommodate small businesses. However, in reality, many large companies gain access to substantial funds through an unsecured loan.
Can businesses with bad credit apply for unsecured business loans?
It is possible, but getting approved with the loan can be more challenging. There are various loan types offered for businesses with poor credit, including short-term loans, working capital loans, and short-term lines of credit, among others.
What happens if I default on unsecured loans?
Since most unsecured loans do not involve collateral, lenders can take legal action against the borrower to reclaim some or all the granted loans. They can also secure an order from the court allowing them to seize the borrower’s personal property.
Do lenders allow early repayments?
Before committing to the loan, the lenders will provide terms borrowers need to adhere to, including early repayments. In some cases, lenders will implement monthly repayments. Meanwhile, others can accept early repayments, but it might cost additional penalties.
How fast can lenders approve an unsecured loan?
It is pretty fast that most lenders can start reviewing and processing your application in just approximately ten minutes. Give it an hour or two for them to disburse your specified loan amount. It’s that quick and easy, given you provide all the necessary documents.
Can borrowers qualify for unsecured loans without a personal guarantee?
Lenders will mostly ask for personal guarantees except for creditworthy and established business owners. Hence, one needs to secure a personal guarantee before applying for and committing to a loan. However, if the business is thriving for a more extended period and can rely on its sales performance, it is possible to get approval without the guarantee.
Understand Your Options
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