Is It Easy to Get Unsecured Business Loans?
Unlike a secured business loan where you may have to put down a business asset as collateral to have access to credit, getting an unsecured loan to increase your working capital or fill gaps in cash flow is one of the best ways to get the funds you need.
Unsecured Business Loans
Repayment Terms for Unsecured Business Loans
The terms for these kinds of small business loans vary depending on several factors. First is that there are different kinds of unsecured business loans, not to mention that every lender also has its respective policies regarding terms and conditions. Whether you are getting a short-term or a long-term business loan, it is important that you know and understand the terms and conditions of the loan you are applying for.
The loan amount that you can get also varies. It is usually up to $50K but it can go as high as $500K. The repayment term ranges from 1 month to 3 years. Depending on the agreement between you and the lender, you can repay weekly or on a monthly basis.
How Does Unsecured Business Loans Work?
For many, unsecured business loan is a type of loan that does not require any collateral. But how does it work? Traditional lenders like banks, SBA startup loans, and other lending companies usually require collateral from business owners before they can have their loan application approved. Without any collateral, lenders evaluate the capacity to pay of the business based on the credit standing of the business owner and performance of the business.
To get your loan approved, you need to qualify first. This is where it gets challenging. First is that you need to have a credit score of +650. Aside from your personal credit score, lenders would also look at the annual revenues of your business. It should be $100k or even more. Ideally, your business should be in operation for more than a year.
Eligibility and Qualifications
Since there is no collateral involved, lenders will use your credit score information and your business’ performance to assess your loan application. There are several criteria used:
- Personal Credit Score
For business owners who have a good credit profile, it is not that difficult to have access to credit although it is never a guarantee even if you have a high credit score. So, why do lenders look at a person’s credit score? This is one way for them to see if the owner is financially responsible. Your credit score may not guarantee you to 100% approval, but if you have poor credit score, then you have a higher chance of being declined.
- Business Plan
If your business has just started or you are planning to start your own, it is difficult to find a lender who will give you the funds you need. Most lenders are careful when it comes to lending money to startups although it does not necessarily mean that you wouldn’t be able to have it. When applying for a business loan, you need to have a sound and reliable business plan. Lenders get to see how your business can finance expenses and pay back the loan.
- Business Performance
For businesses that have been fully operational for years, lenders will look at the performance. If a business is incurring a lot of losses and gaps in cash flow, it is a clear indicator that it is mismanaged which makes it really difficult for a business owner to apply for a business loan. For lenders, this is considered to be high risk. They wouldn’t want to risk lending money to a business that may go bankrupt or end up in default.
Comparing Business Loan Options
An unsecured business loan is a broad category and can be divided into smaller categories depending on the kind of loan you need.
- Personal Loans
Personal loans are best for borrowers who do not really need a huge amount of funds. If you intend to use your personal credit profile since you have just started your business, this is the best option for startups since the interest rates are competitive. The downside is that when you opt for a personal loan, you need to sign a personal guarantee that risks your personal assets. This does not mean that you will use your personal assets as collateral. With a personal guarantee, the lender can see that you at least have assets that can, in turn, help them assess as to whether they should approve your loan application or not.
- SBA Loans
For small businesses, SBA loans can also be a great loan option. The interest rates are considerably lower and the repayment terms are longer. The repayment terms for this type of loan is from 10-25 years while the rates range from 4.7% to 9.25%. The only drawback is that in as much as it gives you a good deal for your loan, qualifying for an SBA loan is quite difficult. It gets much more difficult for start-ups.In addition, lenders that offer SBA loans also have their respective lending requirements despite offering SBA loans. This only means that the lender may still deny your loan application.
- Business Credit Cards
Using your business credit card which is easy to access is considered to be a good way to fund a business. Although the interest rates are higher ranging from 14% to 24%, you don’t have to subject yourself to strict scrutiny since applying for one is not that difficult. There are also many credit card companies that offer rewards when you use your business credit card.
How do you get a business credit card? Well, first of all, you need to have a good credit profile. The minimum credit score should be at least 680. If you have 700+ then it is definitely not a good thing. What are the disadvantages of using business credit cards? First is that credit lines are not that high, around $20K especially if you are just starting your business. Once you have established your business, you can have as high as $100K.
When paying for your credit card, you pay for the interest at the end of the billing cycle. Credit card companies have their fee structure. So, make sure that you are aware of the fees that they charge, including annual fees, insurance, etc.
- Rollover for Business Startups
ROBS or rollover for business startups is a great option, especially for startups. It is basically not a loan. You don’t have to worry about payments since you will not incur any debt. With ROBS, you get to have the money that you need in a tax-deferred retirement account without having to pay for business taxes and withdrawal penalty. This is a great alternative to an unsecured business loan.
Should You Get Unsecured Loans?
Before finally concluding which loan option to choose, as a business owner, you always have to weigh matters and compare your options. Getting an unsecured business loan without a doubt is appealing for small business owners considering that you do not have to worry about collateral requirements. However, businesses vary when it comes to financial circumstances and requirements. In cases where the business owners have poor credit scores, the choices may be limited. Hence, some may opt for secured business loans.
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.
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