Makiko Tanigawa/Getty Images: Illustration by Issiah Davis/Bankrate
Key takeaways
- Unsecured small business loans come in many different forms, so it’s important to choose the right type of loan for your situation
- When comparing lenders, look at the eligibility requirements to see if your business qualifies and compare the interest rates and fees charged
- When applying for an unsecured business loan, you may need to gather your EIN, business formation documents, business financial statements and personal details
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.
| Loan type | Description | Best for |
|---|---|---|
| Term loan | Terms loans give you a lump sum amount that you can use for a purpose that you specify to the lender. Repayments are typically monthly. | Large, one-time expenses |
| SBA loan | Government-insured loans that offer easier qualification, long terms and low interest rates. Most SBA loans allow no collateral for loans of $50,000 or less. | Companies that struggle to qualify for other types of funding |
| Business line of credit | You get approved for an available amount, called your credit limit. You can borrow up to that amount as needed. Then, the line of credit replenishes the available credit as you pay back the loan, allowing you to borrow again. | Businesses that need to borrow funds multiple times or on a regular basis, such as to cover cash flow gaps |
| Invoice factoring | These rely on unpaid invoices to show that you can repay the loan. You get a percentage of the invoice amount to cover expenses. Then, the factoring company buys the invoices and collects the invoices for you for a fee. | Businesses with outstanding invoices that need an advance on funds |
| Business credit card | Cards that you can charge daily expenses or other purchases up to the credit limit. You avoid interest if you pay the balance in full each month. | Small purchases that you can repay in a short time |
| Merchant cash advance | This advance offers you money to cover immediate expenses. But it has aggressive repayments, taking a percentage of daily or weekly credit or debit card sales. | Emergencies or getting funding when you don’t qualify for other loans |
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:
| Type of loans offered | Make sure the lender you choose offers the type of loan you’re looking for. |
|---|---|
| Rates and fees | Compare loan offers to see which lender offers the lowest interest rates and fees. Consider the total interest charged and the total cost of the loan. |
| Eligibility | Every lender sets its own loan eligibility requirements. To qualify, you’ll need to meet the minimum qualifications for your personal credit score, time in business and annual revenue. |
| Repayment terms | Some lenders offer more flexible repayment terms than others, such as long-term loans. Others require short terms like 24 months or less. Depending on the lender, you may also need to make payments on a daily, weekly or monthly payment schedule. |
| Funding speed | Different lenders offer different approval timelines than others. The fastest approvals tend to come from online lenders that advertise a quick approval process. |
Bankrate insight
- Bank of America: Offers a variety of loan types and a large bank network
- Wells Fargo: Offers a variety of lines of credit with rewards program
- Fundbox: Offers a line of credit to fair credit borrowers
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OnDeck: Offers same-day approvals and lenient eligibility requirements
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:
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.
Bankrate insight
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
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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.
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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.
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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.
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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.
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