How to get an unsecured business loan
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Unsecured small business loans give business owners access to capital with no need for collateral. To receive one, you complete an application and provide documentation. Once the application is reviewed and approved, you get your funds.
With unsecured business loans, lenders take a greater risk when borrowing funds, so they must assess a borrower’s creditworthiness and other factors to measure their ability to repay the loan.
1. Make sure an unsecured loan is the best fit
The purpose of your loan can help you decide if a secured or unsecured business loan is the best fit. For example, if you’re purchasing equipment or property, that asset will secure the loan. You’ll likely get a lower interest rate, but if you default on the loan, the lender could seize your asset.
If you plan to use the loan to cover expenses like inventory, rent and utilities, an unsecured loan could be the right choice. Interest tends to be higher than a secured loan, and in place of collateral, a personal guarantee may be required by your lender when applying.
2. Determine how much money you need
Before taking out a loan, you must to determine how much money you need. The average business loan is $663,000, but amounts range from $1,000 to $5 million or more.
Once you determine how much money you need to borrow, you can decide if a term loan makes sense. Perhaps instead of receiving the loan funds in one lump sum, you prefer to open a business line of credit and draw money as needed. You’ll still pay fees, but an unsecured business line of credit only requires you to pay interest on the funds you draw.
3. Seek lenders that match your qualifications and needs
Many lenders are transparent about their business loan requirements. If you confirm each lender’s requirements for an unsecured business loan, you can eliminate the ones from your list that don’t match your qualifications and needs.
Since you’re interested in an unsecured business loan, your options include traditional lenders such as Bank of America and online lenders like Credibly. Online lenders tend to have lenient requirements, but traditional banks offer the best interest rates. Of course, these rates are reserved for well-qualified applicants.
In general, you’ll find that lenders set higher requirements for applicants who want unsecured loans due to the increased risk these loans pose. Alternatively, they may charge significantly higher interest rates to offset that risk.
4. Compare lenders and loans
Traditional and online lenders are common places to get a business loan. As mentioned, traditional banks and credit unions have lower interest rates. Borrowers can also receive face-to-face support. Online lenders operate completely online, so face-to-face support is typically unavailable, but they offer a streamlined application process and fast funding — typically fewer than three days.
As you compare lenders, you also want to pay special attention to interest rates, loan fees and terms offered to ensure the loan isn’t too expensive. If prequalification is an option, you can provide some basic information to see your potential loan amount, interest rate, term and monthly payment.
5. Gather documents and apply
Once you’ve selected a lender, you can apply for a business loan. Typically, borrowers must provide personal and business details, as well as business loan documentation. Confirm with your lender what you’ll need to complete an application.
Requested business loan documentation may include:
- Business licenses and registration
- Business plan
- Legal documents, such as commercial leases and contractor agreements
- Financial documents, such as bank statements, tax statements and accounts receivables
The bottom line
Starting or expanding a business requires money. If an unsecured loan fits your needs, consider the loan’s purpose, how much money you need and your qualifications before you select and apply for a loan.