How to Get a Business Loan Without a Security or Guarantor
You can get a business loan without security or guarantor. However, you may need to pay a large down payment and a higher interest rate for the loan.
Security and Guarantee
Business financing lenders usually require collateral from borrowers. A collateral is a valuable property that you pledge to the lender to secure the loan, like your business title, equipment or vehicle. It serves as the lenders' insurance that the money they lend will be paid back. In case you fail to repay your debt, the lenders can seize and sell the collateral to recover their money.
Some lenders may also require unsecured business loan borrowers to provide a guarantee. This is a formal promise or assurance, written on paper and signed, that someone will personally take over the responsibility of small business loan repayment in case the business is unable to. There are two types of guarantees for unsecured business financing:
- Personal or First-Party Guarantee. You guarantee the loan with your personal asset, like home or land. If your business fails and you cannot repay the loan, the lender will seize your home or land.
- Third-Party Guarantee. Another person or business entity secures the loan for you by putting one of their assets on the line. The lender will also take away their assets in case of loan default.
How Does Unsecured Business Loan Works
An unsecured business loan helps small businesses get funds to run or expand their business without having to pledge any collateral to the lender.
If you are one of the many small businesses and startups that don’t have valuable properties, it can be tough to secure a business loan. Even if you pledge your business as collateral, it still may not qualify for the required age of business and minimum business revenue. This is why many alternative financing lenders offer unsecured business financing for small and startup firms.
To get a business loan without security or guarantor:
1. Apply with online lenders.
Your chance of getting approved for a business loan without pledging any collateral at banks and traditional financing institutions is very low to zero. Instead of wasting time making inquiries from such financial institution and risking your credit score, get pre-approved for an unsecured business loan or alternative small business financing at online lending providers.
Online lending providers like Positive Lending Solutions offer a quick and convenient way to get approved for business financing. They simplify the process by digitalising a big part of the application. You simply need to fill out an online form or talk directly to one of their lending specialists over the phone to discuss your loan options. Then, submit your personal details and required documentation online. Your enquiry will be submitted to the lender that best matches your needs.
Typically, an unsecured business loan requires a:
- big down payment
- higher interest rate
- strong business structure (at least 1 year in business with a revenue of $100,000)
- good bank statements
- good credit history
Once all their qualifications are met and any clarifications are addressed, the lender will provide their unconditional approval.
Remember to do your shopping and pre-approval application for multiple small-business loans within two weeks to avoid negatively affecting your personal credit score.
2. Prepare to be assessed.
Once you get pre-approved for an unsecured business financing, get ready to be assessed. The lender will pull out your credit profile from the national credit reporting bureaus (CRBs) to check your credit history and attitude towards past debt. The CRBs makes a record every time a lender accesses your credit profile and puts this information in your credit profile as a soft or hard inquiry. Both negatively affects your credit score. However, all inquiries made by lenders within two weeks is counted as one. This is why it’s essential to limit the loan shopping to only two weeks.
Aside from your credit profile, other supporting documents are essential for approval and calculation of your loan rate and terms.
The necessary documents usually include:
- Tax returns (business and personal)
- Bank statements (business and personal)
- Business financial statements
- Business-related legal documents (e.g., articles of incorporation, commercial lease, franchise agreement)
3. Estimate your payment.
Before signing your small business loan contract, don’t forget to get some sense of what your loan repayments will be. This helps you understand your commitment once you take out the loan. You can get an estimate of your loan repayments using an online Business Loan Calculator.
Know these terms to better understand your calculated results:
- Monthly Payment. Your total monthly repayment, which includes principal, interest and fees.
- Total Payment. The sum of all the payments on your loan, including the amount you borrowed, down payment, interest and fees.
- Total Interest Paid. The amount that the lender charges you for the loan. You may be able to save on the loan interest if you repay early. However, there are also lenders charge for early repayment. This is usually equivalent to one or two month's interest.
- APR. This is the true annual cost of the loan, including fees. This is dependent on your credit score and your business’s age and annual revenue. Some lenders give a general interest rate instead of an APR.
4. Get alternative business financing.
It is generally difficult to get business financing on your first year, even an unsecured business loan. While collateral is not needed, the lender usually requires a strong business structure to have good assurance of getting repaid. Thus, if you’re still running your business by the seat of your pants and have cash flow problems time and again, you may be disqualified.
If you get disapproved for an unsecured business loan, get a:
- Business Credit Card. Intended for business use, a business credit card allows you to make business-related purchases and payments for an agreed limit. You can spread the repayments over a period of time, with interest payable on monthly outstanding balances. Aside from providing your business with the much-needed financial cushion especially when it is short on cash, you can also get rewards and incentives. With responsible use, you can build your credit profile and improve your chances of securing loans in the future.
- Merchant Cash Advance (MCA). A lender provides you with a set amount of cash, which you can repay with a set per cent of the daily credit card sales of your business. In essence, your lender is buying a portion of your future sales. You can pay more when your business is booming and less when it slows down. While it’s easy to get an MCA, it is also one of the most expensive forms of small business financing with annual percentage rates (APRs) that can get as high as 350%.
- Microloan. This is a small loan issued by private individuals or non-profit organizations. The maximum amount that you can borrow is around $35,000 but some microlenders also lend up to $50,000. While the approval criteria differ from one lender to another, microlending generally gives bigger importance to your business goals and objectives rather than your credit score in determining your eligibility.
- Personal loan. This type of financing is not purpose-specific and can be used for various projects, including business endeavours. An unsecured personal loan doesn’t require collateral, but you need to have a good credit profile and score, as well as a good debt-to-income ratio to get approved. Aside from approval, you can also get a low interest rate if you have an excellent credit score. However, the maximum amount that you can borrow is only around $50,000, usually payable for a short-term period of 2 years or less.
Positive Lending Solutions offers business financing and personal loans, which can be used for entrepreneurial pursuits. Request a Pre Approval or call us on 1300 722 210 to know the best business financing option for you.