This article is part of a larger series on Business Financing.
A brand new business may need financing without having the assets to obtain a secured loan. An unsecured business loan can give a startup the much-needed capital to get off the ground. When considering what type of unsecured loan to apply for, a business should compare the qualifications needed, the interest rate on the money borrowed, and the difficulty involved in securing each type of loan.
To get an unsecured business loan, follow the four steps below.
1. Evaluate Your Unsecured Startup Business Loan Options
There are many ways to finance your startup. You’ll need to decide which type of unsecured loan will work for you first. Here are the best ways to fund your business with an unsecured loan:
Rollover for Business Startups (ROBS)
Business owners willing to invest retirement funds of $50,000 or more
Business Credit Cards
Business owners good at repaying debt and who want quick access to funds
Business owners with good personal credit who need up to $50,000 in funding
Friends & Family
Borrowers with wealthy friends and family interested in investing in their business
2. Determine Your Eligibility
A startup business might not have extensive financial records or debt repayment history, which can work against it when applying for credit. This makes the owner’s personal credit score and the company’s business plan essential in the loan approval process.
Personal Credit Score
For an unsecured loan, you should have a credit score of at least 650. In some cases, lenders won’t approve an unsecured loan for someone with subprime credit (below 680 credit score).
Interest rates on unsecured loans tend to be high: the lower your credit score, the higher your interest rate, and the more expensive the loan.
Because a startup might have a limited financial history, a sound business plan is crucial for a new company to be approved for an unsecured loan. A lender will consider how thorough the plan is, what industry you’re in, the prospects for success in that industry, and how you plan to gain and keep customers. A detailed financial projection is critical for showing a lender that giving your startup an unsecured loan is worth the risk.
Your business plan should include the following sections:
- Executive summary
- Problem you’re solving and description
- Product or services overview
- Target market
- Competitor analysis
- Business model
- Bios of your operations team
- Financial plan
- How much that you need to borrow
3. Apply for Your Unsecured Startup Business Loan
The next step is to submit your application. There are several different types of loans available, each with its own specific qualifications, so each type will have different documentation requirements. In general, you should gather the following documents before applying:
- Tax returns (business and personal)
- Business financial statement (profit and loss)
- Business incorporation agreement
- Federal tax ID number
- Bank statements (business and personal)
- Business plan
- Additional cash flow statements
4. Review and Accept Your Loan Offer
Once you have received your loan agreement from your lender, review it carefully before signing it. Because unsecured loans can have high interest rates, it’s important to understand the actual costs of the loan before accepting. If any terms and conditions aren’t agreeable to you, don’t sign the loan offer. You’re not obligated to repay the loan until you sign the agreement.
If the terms are agreeable to you, sign the financing agreement. In most cases, funding should be received within 24 hours of loan closing, if not immediately. However, if you choose a ROBS for startup financing, it’ll take longer to set up and receive funds.
Alternatives to an Unsecured Business Loan for Startups
While an unsecured loan might work best for your startup, there are other alternatives to consider, including equipment financing and crowdfunding. Merchant cash advance financing is another option, but interest rates tend to be very high, so you should only use it if your business cannot qualify for any of the other types of financing outlined in this article.
- Equipment financing: If a startup needs equipment rather than cash, equipment financing is a good option. It allows the business to finance the purchase of a new or used piece of equipment required to generate revenue. Existing equipment can also be refinanced through equipment financing loans. The equipment being purchased or refinanced is used as collateral. Smarter Finance USA is an excellent choice for startups looking for equipment financing.
- Crowdfunding: One of the fastest-growing startup business funding methods is crowdfunding: the act of raising small amounts of money from a large number of people. This is usually done through an online platform, with the business owner offering goods or rewards in exchange for the funds. There are numerous websites available for crowdfunding, with Kickstarter and Patreon being two of the most popular sites.
- Merchant cash advance (MCA) financing: MCA financing allows companies to receive a lump-sum advance payment in exchange for a fixed percentage of their daily credit card receipts. MCAs are an expensive form of credit and should only be used as a last resort by businesses that cannot qualify for other forms of financing.
A startup may need to take out an unsecured business loan if it doesn’t have the assets necessary to obtain a secured loan. There are several good options for unsecured loans; however, some are either very complicated to set up or come with high interest rates. Therefore, the business owner should consider all options when choosing an unsecured business loan product that best suits their needs.