How to get an unsecured business loan

An unsecured small business loan is a type of loan that does not require collateral. Unsecured loans help business owners who need financing but don’t have assets to secure the loan. They also work well if you don’t want to back the loan with valuable assets, which the lender could seize if you can’t make payments.

But unsecured business loans are usually only available to business owners with a strong credit profile and finances. Since these loans are a higher risk to the lender, they also may come with higher interest rates than a secured business loan. Follow these steps to get an unsecured business loan that works best for your situation.

Decide what type of unsecured small business loan

The first step in getting an unsecured business loan is to choose the right type of unsecured business loan. You can get many different business loans as an unsecured loan. But you might choose specific loans based on the reason you’re getting business funding.

Figure out how much loan can you afford

The amount of business loan you can afford will depend on your business revenue, expenses and other debt obligations you have. In general, you want to make sure that the loan payments will easily fit into your business budget.

The lender will also look at a few factors to determine whether your business can handle repaying the loan. Those include:

• Debt-to-income ratio: DTI calculates how much of your current revenue is devoted to debt repayments. Lenders like to see a DTI of 36 percent or less, though some will allow higher.
• Debt service coverage ratio: Debt service coverage ratio calculates how much more revenue you have than your debt repayments. Most lenders like to see a DSCR of at least 1.25, and higher is better.

You can use a business loan calculator to help you estimate loan payments before you start the task of applying for business loans. Fitting loan payments into your budget will go a long way in helping you manage your unsecured business loan.

Decide how fast you need funds

The lender and type of loan you choose may depend on how quickly you need the funding for your business operations. If you’re preparing for a future expense but can wait, traditional banks tend to offer lower interest rates and long repayment terms compared to other lenders. Banks tend to take a week or longer to approve funding.

If you need fast business funding, many online lenders advertise funding within 24 to 48 hours. These lenders use technology and alternative data sources to determine if you can repay the loan. They also tend to have lenient eligibility guidelines, such as accepting fair or bad credit.

If you’re applying for an SBA loan, expect the approval process to take 30 to 90 days. You may choose these loans if you don’t qualify for a conventional loan and can wait for funding.

Compare unsecured business loan lenders

The next step is to shop around and compare unsecured business loan lenders. Compare these features about each lender to find the right lender and unsecured small business loan option:

Gather required documents and information

When you apply for an unsecured business loan, the lender will look at your business finances to determine whether you can afford the business loan repayments. Gather these documents when you apply for the loan and have them ready in case the lender asks for them. Having the correct documentation can speed up the loan approval.

Common information to have ready:

• Your personal contact information
• Your Social Security number
• Your business formation documents
• Your Employer Identification Number
• Any licenses or permits
• A business plan
• Bank statements
• A balance sheet
• Income and cash flow statements
• A list of current payables and receivables

Apply for an unsecured business loan

You’ve done the legwork with comparing lenders, meeting the minimum qualifications and getting your documents in order. Now, you can apply for the unsecured business loan and wait for a decision from the lender.

Before signing on the dotted lines, read through the loan agreement and ask the loan officer questions so that you understand what you’re signing.

If all goes well, the lender will approve your loan, and you’ll receive your funds.

Alternatives to unsecured business loans

An unsecured small business loan may not be an option for you if you don’t have a strong credit profile or if you need more favorable loan terms. Instead, you might consider these alternatives to unsecured business loans:

• Secured business loans: If you have business assets, you can secure the business loan with assets to lower the risk to the lender. You may qualify for lower interest rates or better repayment terms than an unsecured loan.
• Secured lines of credit: Secured lines of credit like Bank of America’s cash-secured line can help startups or subprime borrowers qualify to open one. But your credit limit – the maximum amount you can borrow – may be limited. You may need to put down a security deposit or assets to secure the line.
• SBA loans: Some SBA lenders cater to disadvantaged communities or business owners with fair or poor credit. Those include lenders offering SBA microloans as well as specific lenders like Funding Circle and Creditfy.
• Business grants: You can find business grants from local corporations or the state or federal government. You typically don’t have to repay the grant. But applications are competitive, and you may have to wait a long period to determine if you won the funding.
• Crowdfunding: You can raise funds through traditional crowdfunding, allowing family, friends and individuals to invest in your business. Or you can use debt crowdfunding, which grants you a business loan from individuals, or equity crowdfunding, which awards investors with equity in your business in return for funding.
• Peer-to-peer lending: Peer-to-peer lending allows you to get a business loan through private individuals. You may not have to meet typical business loan requirements to qualify. But you will need to repay the loan with interest, much like a traditional business loan.

Bottom line

If you have strong credit and business revenue, unsecured business loans can help you get funding without needing assets to back the loan. You can get a variety of business loans unsecured, including term loans, lines of credit and small SBA loans. Once you narrow down the type of loan, you can search for lenders that offer that type of loan.

But different lenders set different criteria to qualify for their unsecured loans. If you don’t meet the qualifications or are in a financial gray area and need better loan interest rates, consider other options, such as a secured loan or alternative lending.

Frequently asked questions

• What happens if you can’t pay back an unsecured business loan?

  If you can’t pay back an unsecured business loan, your loan will go into default. The lender can demand immediate repayment of the loan and may go after personal assets, especially if you signed a personal guarantee. If you can’t make repayments, contact the lender to talk about forbearance, deferment or settling the debt at less than you currently owe.
  

• Are unsecured loans hard to get?

  Unsecured loans can be more difficult to qualify for than secured loans, especially if you have fair or bad credit. Since the loan isn’t backed by assets, it’s more risky to the lender. The lender will want to make sure that you have solid finances and credit when approving you.

• Is an SBA loan an unsecured loan?

  SBA loans can be either secured or unsecured. Most SBA loans don’t require collateral for loans up to $50,000. Loans above this amount are typically subjected to the lender’s usual policies for requiring collateral. But SBA lenders can’t deny you based solely on lack of collateral.

• What to do if your business loan is denied?

  If your business loan is denied, you can ask the lender the reason for your denial to help you prepare for future loan applications. You may need to build your business credit score, such as by opening trade credit or disputing errors on your credit report to boost your score. You can also apply for a business loan with alternative lenders like merchant cash advance companies.