How to Get an Unsecured Business Loan
With an unsecured business loan, you can avoid the risk of turning over a valuable asset to the lender in case of loan default. However, you will likely pay higher for the interest rate and other fees associated with the loan. You may also need to secure personal guarantees or file liens just to get approved.
However, the high risk associated with an unsecured business loan makes it hard to get approved for.
Unsecured Business Loan Requirements
The type of unsecured business loan you’re getting determines the requirements and amount of paperwork you’ll need. Generally, however, you need to have a good credit score and a positive cash flow to get approved.
Good Credit Score
You need a credit score of at least 650 to get approved. If you're a prime borrower with a credit score of 750 or higher, you will likely enjoy special interest rates.
Business Time and Revenue
Ideally, your business must be operating for at least one year and is making a minimum total revenue of $100,000 to qualify. This will ensure the lender that your business has a strong and positive net cash flow from its operating, investment and financial activities. This not only means that your business will stay long, but you also won’t have a hard time paying off debt.
Some lenders may require a lien on your business assets until you can fully pay the loan balance. This legal claim against your business properties provides assurance to them that the debt will be repaid. Even if you fail to fulfil your loan obligation, the lenders can sell the assets and recover their money.
This is an unsecured written promise by you as the business owner or as a partner to pay any outstanding loan obligation if your business fails. It is not tied to a specific asset but if the loan is not repaid, it could wind up on your credit profile and damage your credit score.
Choosing the Right Unsecured Business Financing
There are several unsecured business loan options that a small business or startup company can choose from.
It generally offers a smaller loan amount but with interest rates that range from 5% to 25% and repayment terms of 1 to 5 years. To get approved, present a good credit profile and business plan (e.g. how you plan to spend the money). It's ideal if you have at least 680 credit score and only needs around $50,000 in financing.
Business Credit Card
An essential financial toolkit for startups, it’s usually the first financing that you can get. It also provides cash back rewards with regular use. The credit card limit is around $20,000 for small businesses and $100,000 or higher for the established ones.
To get one, you must have a minimum credit score of 680. Meanwhile, the interest rate is around 15% to 25% but you only pay the interest on what you owe at the end of the billing cycle. Some credit cards, however, come with an annual fee. Make sure to know all potential fees before getting one.
A Small Business Administration (SBA) loan is the most sought-after financing of small businesses because it offers a large loan limit, low interest rates of around 5% to 11% and long payment terms of 10 to 25 years. However, it needs a lot of documents and around 25% to 30% downpayment.
Some SBA lenders may also require you to invest money in the business you’re seeking funding. The processing takes around 45 to 90 days or more. Thus, it is ideal if you are a prime borrower seeking a long-term capital.
Rollover for Business Startups (ROBS) provides a valid alternative to an unsecured startup business loan. It lets you access funds in a tax-deferred retirement account for business purposes without paying early withdrawal penalties or taxes.
To qualify, you must have a tax-deferred account, at least $50,000 in retirement savings and your business must have a C corporation status. You also need to work for your business and eligible for the retirement plan than just being a shareholder.
Interest Rates and Loan Terms
Since the risk of an unsecured business loan is higher for lenders, its interest rate is often twice as high as that of secured business financing. The typical APR is around 10% to 30% while the average cost of capital is $1,000 to $3,000 in interest per $10,000 borrowed.
While the loan terms vary depending on the lender, the repayment period is generally around 1 month to 3 years with weekly or monthly repayment cycle. An exception for this is the SBA loan, which typically has long terms and low interest rates. However, it is one of the most difficult unsecured business financings to get.
It's important to get the right loan for your business. Ending up with the wrong one can create a huge financial problem that can significantly affect your business. Additionally, defaulting on your loan affects your business' credit rating. Even if you file for bankruptcy, the court may not discharge you if the lender has already obtained a judgment against you.