Business LoansUnsecured Business Loans: How to Get Collateral-Free Financing

How to Find the Best Unsecured Business Loans

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Unsecured business loans are an excellent source of financing for small business owners. They can be used for almost anything, including purchasing inventory, upgrading equipment and increasing marketing efforts. If your company is in need of additional funds, you’re in luck. According to the Biz2Credit Small Business Lending Index, August 2018 saw record high small business loan approval rates. Big banks rose to 26.5 percent from July’s 26.3 percent, while small banks had approval rates of 49.8 percent. If you opt to go with an alternative lender, your chances of securing a loan increase to 56.6 percent.

What is an unsecured business loan?

Unlike a secured business loan, unsecured loans do not require any form of collateral. Instead, lenders base their decision on the business owner’s personal credit history. Applications require less paperwork, as there are no assets to appraise.

There are several different types of unsecured business loans to consider when your company is in need of funding.

  • Term loans. Short and long-term loans allow businesses to borrow a large sum of money at once. The principal and interest rate are combined to determine the repayment amount and then payments are required to be made regularly over the designated term of the loan.
  • Lines of credit. A line of credit is similar to a term loan in that you are approved for a set amount of funding. Unlike term loans, you can draw on this money whenever the need arises. You have the flexibility to utilize part or all of the line of credit. You’ll then pay the money you withdraw back over the designated time period in your loan contract.
  • Invoice factoring. Businesses that have a lot of invoices that don’t have immediate due dates may want to take advantage of invoice factoring. With this type of loan, a lender purchases the invoices for cash. It is then the lender’s job to collect the amounts owed on the invoices. This is also a good option for businesses with bad credit, as the lender only looks at the customer’s payment history.
  • Equipment financing and leasing. If your sole purpose for needing extra funds is to buy or lease equipment to run your business, an equipment financing and leasing loan is the way to go. The loan covers the purchase of used equipment, as well as new.
  • Merchant cash advance. With a merchant cash advance, the lender looks at your current revenue and credit card sales to determine how much of an advance you qualify for. The money is paid to you upfront with a percentage of future revenue and credit card sales being used to pay off the debt.

Are unsecured business loans really hard to get?

Secured business loans are often easier to obtain, as the required collateral reduces risk to the lender if the borrower defaults. You may be surprised to discover, however, that unsecured business loans aren’t necessary hard to get. Financial institutions examine everything from a company’s credit score to its overall business performance when making a decision. Alternative lenders often have high approval ratings. Expansion Capital reports a 60 percent approval rating, while Reliant Funding approves more than 70 percent of its applications.

If your business qualifies as a special interest group, you can increase your chances of approval by applying for a specialty loan. For example, National Funding has small business loans for companies that are minority-owned, women-owned or veteran-owned.

Best lenders for businesses with a credit score under 600:

  • OnDeck. Business owners need a personal credit score of at least 500.
  • Kabbage. Kabbage doesn’t just look at your credit score; it also focuses on your business performance.
  • CAN Capital. CAN Capital considers individuals who don’t have the best personal credit.
  • Fora Financial. Fora Financial doesn’t believe credit scores define businesses. It looks at the company’s business model and future plans.
  • Expansion Capital. Both owners and co-owners need only have a personal credit score of 500 or higher to qualify for a loan.

Best lenders for businesses with a credit score over 600:

  • National Funding. Although the company doesn’t list the minimum credit score for all of its loans, it does state that businesses need to have a FICO score of over 620 for its equipment financing and leasing.
  • BlueVine. BlueVine will accept a credit score of 530 for invoice factoring, but it requires a score above 600 for its business line of credit.

How to get an unsecured loan

The first thing you need to do to get an unsecured loan is to review the lender’s qualifications. You don’t want to waste time filling out an application if you don’t meet the company’s minimum requirements to apply. A few common qualifications include:

  • Length of time in business. BlueVine lists a three-month requirement for invoice factoring and six months for lines of credit. Still others, such as Kabbage and OnDeck, have one year in business as their eligibility figure.
  • Annual or monthly revenue. BlueVine, OnDeck and Reliant Funding want to see at least $100,000 in annual revenue. If your business brings in a little less, try Kabbage, which only asks for $50,000 in annual revenue, or Shield Funding, which requires $10,000 in monthly revenue.
  • Bank statements. Expansion Capital Group and Shield Funding both ask for three months of bank statements. OnDeck specifically requires you to make at least five deposits per month into your business checking account.

The second step is to discover what information you need to apply. Most companies require the following:

  • Owner’s name and Social Security number
  • Business name and either employer ID or tax ID
  • Proof of ownership
  • Business licenses
  • Property lease agreement
  • Proof of revenue

Some companies have special requirements, like Kabbage, which asks for a personal guarantee on its unsecured loans. Once you’ve gathered the proper documents, you can fill out and submit the application.

Finally, you’ll need to accept the loan if approved. Depending on how you opt to receive the funds, you may be asked to supply your PayPal email address or your business checking account info.

What is a self-secured loan?

A self-secured business loan is one that uses the loan item as collateral. There are two main types: equipment financing and leasing and invoice factoring.

Equipment financing and leasing

When you secure funds to lease or purchase new or used equipment for your business, the equipment you obtain then becomes the collateral for the loan. Not only does this loan type free up your working capital, but it also saves your business money thanks to the allowable tax deductions under IRS Section 179.

Invoice factoring

With invoice factoring, your company’s invoices become the collateral. The invoices are sold to the lender at a percentage of what’s owed. For example, BlueVine pays borrowers between 85 and 90 percent of the invoice amount upfront. Then it takes a fee once the invoice is paid and returns any overages to the borrower. So, if you sold a $100 invoice to a lender at 85 percent, you’d receive $85. If the lender had a $10 fee, then you’d be refunded $5 once the $100 invoice was collected.

What to consider when applying for an unsecured loan

When applying for an unsecured loan, there are a few things you need to consider. Begin by checking whether you have any issues that would disqualify you from being approved for a loan. These include bankruptcies, judgments or liens and negative landlord references, which are all circumstances that would make it difficult for a lender to approve a loan.

Next, you’ll need to select a lender, but before you do, it’s a good idea to examine both traditional unsecured small business loan offers and those provided by reputable alternative lenders to see which has the best deal. Start by comparing interest rates, origination fees and prepayment penalties.

You’ll also need to consider the term of the loan and how often the repayments are required to be made. For example, term loans tend to have a monthly repayment obligation, but other types of loans sometimes come with an automatic weekly or daily payment requirement. Finally, you’ll need to make sure your business can afford the loan, as late payments will lead to a drop in credit score.

The bottom line

Whether you have excellent credit or can show a strong business performance, unsecured business loans are a great resource for meeting your company’s financial needs. With so many different types of loans available through a variety of lenders, it is important to shop around. This is the best way to identify the most affordable option with the most favorable terms to aid in the success of your business.


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