Small business owners can obtain funding without requiring collateral thanks to unsecured loans. You must fill out an application and submit supporting paperwork in order to get one. You receive your money after the application has been examined and approved.
Since lenders bear more of the risk when funding unsecured business loans, they must evaluate a borrower’s creditworthiness in addition to other aspects of their ability to repay the loan.
Make sure an unsecured loan is the best fit
Determining whether an unsecured or secured business loan is the better option depends on the goal of the loan. For instance, the asset you’re buying—property or equipment—will secure the loan. Although the interest rate will probably be lower, the lender has the right to seize your asset if you don’t repay the loan.
An unsecured loan can be the best option if you want to use it to pay for things like inventory, rent, and utilities. Interest rates are typically higher than those of a secured loan, and when you apply, your lender might ask for a personal guarantee in lieu of collateral.
Determine how much money you need
You have to decide how much money you need before you take out a loan. The range of business loan amounts is $1,000 to over $5 million, with an average loan amount of $663,000.
You can determine whether a term loan makes sense once you have estimated how much money you need to borrow. You might prefer to open a business line of credit and take out loans as needed rather than getting the money all at once. With an unsecured business line of credit, you just have to pay interest on the money you take out—you won’t be exempt from fees.
Seek lenders that match your qualifications and needs
Many lenders are open and honest about the conditions of their business loans. You can cross off lenders from your list that don’t fit your needs and qualifications if you verify their requirements for an unsecured business loan.
You have access to both traditional lenders like Bank of America and online lenders like Credibly since you’re interested in an unsecured business loan. Traditional banks have the best interest rates, but online lenders typically have more relaxed requirements. These rates are, of course, only available to eligible candidates.
Lenders typically impose stricter requirements on applicants seeking unsecured loans because of the higher risk involved. To mitigate that risk, average rates for unsecured business loans are typically higher than those for secured business loans.
Compare lenders and loans
It’s common to obtain a business loan from both traditional and online lenders. As previously mentioned, interest rates are lower at traditional banks and credit unions. Furthermore available to borrowers is in-person assistance. Online lenders offer a simplified application process and quick funding, usually within three days, but they operate entirely online, making in-person support unavailable.
Make sure the lenders you are comparing offer the kind of unsecured business loan that best suits your requirements. That could be a revolving credit line to cover unforeseen expenses or a term loan with an extended payback period.
Additionally, to make sure the loan isn’t too costly or challenging to manage, you should pay close attention to the interest rates, loan fees, and terms provided. If you choose to be prequalified, you can see your possible loan amount, interest rate, term, and monthly payment by giving some basic information. Examine various options and shop around before applying for an unsecured business loan.
Gather documents and apply
You can submit an application for a business loan after choosing a lender. Borrowers typically need to submit documentation for business loans along with personal and business details. Find out from your lender what is required for you to fill out an application.
Documentation for a business loan request could contain the following:
- Details of business formation
- Sheets of balances
- Projections and the business plan
- Contractual agreements and commercial leases are examples of legal documents
- Financial records, including tax returns, bank account statements, and accounts receivable
Alternatives to unsecured business loans
There are alternatives to unsecured business loans, even though they can give your company quick access to cash. There may be alternatives to unsecured business loans that better fit your requirements or your risk tolerance.
- Secured business loans: These loans have lower interest rates but require collateral upfront as assurance that you will repay the loan.
- SBA loans: The U.S. Small Business Administration provides several loans, with loans under $25,000 not requiring collateral.
- Secured credit lines: Revolving credit is a type of credit line. You only pay interest on the amount you use, up to a pre-approved maximum. A cash deposit is usually needed to secure a secured line of credit.
- Invoice financing: You can borrow money against unpaid invoices from customers using this kind of credit. When the invoice is paid, a portion of it will go to the financing company.
- Grants: Funds that do not need to be repaid are available to certain businesses through grants. To get the money, you have to fulfill certain requirements.
- Crowdfunding: Companies can use crowdfunding to raise money by requesting donations from their supporters. Businesses usually offer investors a product or service in exchange.
- Peer-to-peer lending: By using a platform to approach private funders for funding, peer-to-peer lending may help you avoid traditional lenders. One or more parties may provide funding for your loan.
The bottom line
Funding is necessary for a business to launch or grow. Unsecured business loans can be beneficial, but there are advantages and disadvantages to weigh. When choosing and applying for a loan, take into account your qualifications, the purpose of the loan, and the amount of money you require, if an unsecured loan suits your needs.
Frequently asked questions
Do banks give unsecured business loans?
Yes, Unsecured business loans are provided by numerous banks and other financial organizations. However because they carry more risk for a lender, their approval requirements are usually higher.
Can a small business loan be unsecured?
Yes, An unsecured small business loan is possible. The business owner can obtain the funds from these loans without having to provide any collateral. You may be able to obtain an unsecured business loan if your company is well-established, has a high credit score, and generates revenue.
What are the requirements for an unsecured loan?
An unsecured loan may have different requirements, but generally speaking, companies must submit business records such as profit and loss statements, balance sheets, tax returns, and financial statements. In certain situations, details regarding the business owner’s personal credit or finances might also be required.