How To Get Unsecured Startup Business Loans in 6 Steps in 2023
This article is part of a larger series on Business Financing.
Getting an unsecured startup business loan involves several steps that include understanding your business needs and what a lender can offer. This will allow you to more effectively use the funds to grow your business by obtaining equipment, capital, or other needs. With a good understanding of all your options, you could also save money on loan fees and interest charges.
Step 1: Evaluate Different Types of Unsecured Startup Business Loans
Unsecured business loans don’t require you to pledge collateral, so it’s a lower risk to you since the lender can’t take away your business property even if you default on the loan. These loans come in different forms.
Loan Types | Best For |
|---|---|
Unsecured Closed-end Term Loan | Business owners who know exactly how much cash they need |
Unsecured Business Line of Credit | Businesses that want quick access to funds to cover emergencies |
Small Business Credit Card | Businesses that want to earn rewards on purchases |
Personal Loan for Business Purposes | Borrowers with good credit and have credit scores above 700 |
To make the most of your loan, you should know what you will use the funds for and how it will help your business. Prioritize which of your business goals are most important and are likely to give you the best return on your investment in the short and long term.
Unsecured term loans give you a lump sum of cash upfront and require periodic payments, typically weekly or monthly. Interest rates generally are fixed, so your monthly payments will remain the same. Funds received from this type of loan can typically be used for any type of business purpose.
Specialized term loans also exist. However, they often require the funds to be used for a specific purpose and require you to pledge some form of collateral, such as equipment loans and working capital loans.
An unsecured business line of credit is a revolving loan that allows you to draw on its credit limit to get cash deposited to your bank account. Unlike a closed-end term loan, you have the flexibility to draw only the amount you need on an as-needed basis. This makes it a great choice for covering temporary cash flow shortages or emergencies.
Many lenders offer lines of credit up to $250,000 and required repayments are based only on what you draw. Funds drawn must also typically be repaid in a short period of time, usually between 12 and 24 months. We recommend Bluevine for its competitive rates and fast approvals.
Small business credit cards are another form of revolving credit that allow you to make purchases up to the card’s credit limit. You must make minimum monthly payments based on your loan balance, but the loan can last indefinitely as long as you make the payments on time. Credit card rates tend to be much higher than other forms of credit—usually 20% or higher—so it’s often best to use a credit card for short-term expenses only.
If your business cannot qualify by itself, a personal loan for business funding allows you to get funding for your company as long as you have a strong personal credit profile. Personal loans can be in the form of a closed-end term loan, where you receive a lump sum of cash and make periodic payments until the loan is paid off.
Interest rates are often fixed, so you won’t have to worry about your monthly payments going up. You can consider an online lender like LightStream for its low rates and fees.
Step 2: Determine Your Eligibility Based on Loan Requirements
Qualifying for an unsecured loan as a startup can be difficult if you have a limited history of being in business. Lenders can look at your credit scores, business finances, and business plan in deciding whether to issue you a loan.
The exact eligibility criteria will vary based on the lender and type of loan. The terms you’re offered will also depend on how well-qualified you are.
If you have a credit score of 680 or higher, you’ll have a much higher chance of getting approved. Higher credit scores can also usually qualify for better rates. Credit scores are determined by five major pieces of information:
- Payment history: Consistently making timely payments will help you get a higher credit score. Late payments have less of a negative impact on your score as more time passes, and more severe negative items—such as collections and bankruptcies—will have a greater effect.
- Amounts owed: Using a high percentage of your available credit could signal to lenders that you may be at a higher risk of defaulting. A good rule of thumb is to use less than 30% of your available credit limits on credit cards.
- Length of credit history: Your credit score considers not only the age of your oldest credit account but also the average age of all of your combined accounts.
- Mix of credit: Having experience with different types of loans shows you can handle credit responsibly. Types of loans can include credit cards, auto loans, and mortgages.
- New credit: Borrowers seeking or opening multiple credit accounts in a short period of time typically represent a higher risk of defaulting.
If you’ve recently paid off a large balance on a credit card and want your credit score to reflect this quicker, you can ask the credit card provider to make an off-cycle update to the credit bureaus. Otherwise, it can take up to five weeks, as most providers only send updates to the credit bureaus once a month.
Having strong finances, even if only for a short period as a startup, can boost your odds of getting approved for an unsecured startup business loan. Healthy businesses typically have consistent positive cash flows, high net income, and low levels of business debt.
If you have been in business for less than several months, more emphasis may be placed on your business plan instead of your business finances. A business plan tells a lender what your business goals are and how you plan to achieve them.
Common items in a business plan include:
- Executive summary
- Overview of your products and services
- Target audience
- Competitor analysis
- Marketing strategies
- Budget
- Projections for revenue and expenses
- Analysis of industry-specific risks
Step 3: Shop Multiple Lenders
Lenders each have different policies and loan programs, and researching at least several providers will improve your chances of finding the right one for your business—you can start with our list of the best unsecured business loans. Lenders sometimes offer introductory rates or temporary incentives, so it’s worth checking with a lender even if you are familiar with its loans. It can also be helpful to get quotes from multiple types of providers, such as credit unions, banks, and online lenders.
In choosing a provider or a loan, prioritize what features are most important to you and what you can do without because it may not be possible to find a provider that does well in all areas. This can include things like rates, fees, customer service, repayment terms, and monthly payment amounts.
Step 4: Submit an Application
When you have decided which provider to use, your next step will be to submit a formal loan application. Alternatively, if you’re still shopping lenders, you may need to submit an application to get an accurate rate quote or additional information.
Most applications can be completed online in less than 5 minutes, although many providers also allow for this to be done in person or over the phone. Loan applications will ask for basic information about you and your business, such as your time in business and monthly income. You’ll also specify the amount and type of loan you’d like to get.
Step 5: Provide Documentation to the Lender
Providing documentation to the lender is required so that it can conduct its review of your business and personal finances in determining whether the business meets its lending requirements. The following are commonly requested items that you should be prepared to provide to the lender:
- Federal tax ID number
- Personal and business tax returns
- Personal and business bank statements
- Cash flow statements
- Profit and loss (P&L) statements
- Business plan
- Articles of incorporation for your business
Step 6: Review & Accept Your Loan Offer
Once the lender has reviewed your application, it will provide you with written disclosures detailing the terms of the loan you have been approved for. You should review these disclosures carefully and ask questions about anything that’s unclear. Important loan terms to review include:
- Loan amount
- Interest rate
- Fixed vs variable rate loan
- Loan term
- Frequency of required minimum payments
- Loan fees
If the lender is unable to approve a loan for you or your loan approval is insufficient, then you can ask how the provider came to that decision. Lenders sometimes make mistakes, and they may be able to issue more favorable loan terms if you can help them identify errors on things like miscalculated business revenue or debt payments.
Other Things To Consider
Taking out an unsecured startup business loan is not something to take lightly because missing payments could result in late fees or legal action to be taken against you or your business. You could also end up accruing unnecessary expenses if you don’t use the loan proceeds effectively. Here are some additional items to consider before you take out a business loan.
If you’re taking out an unsecured startup business loan, consider your confidence level in how it’ll impact your business revenue and its ability to generate enough income to repay the loan. Things do not always go according to plan, so it’s also a good idea to have a backup plan if you realize that you aren’t getting the intended results from the loan proceeds. This could include selling personal or business property to raise cash to repay the loan.
Having an emergency fund can help cover temporary cash flow shortages that could otherwise cause you to have to make a late payment and incur additional fees. The size of your emergency fund will depend on your specific business. Seasonal businesses may need more cash in the offseason while those that depend heavily on business equipment to generate revenue may want at least enough cash to repair or replace vital equipment.
Depending on your loan agreement and lender’s policies, missed payments on your business loan could also affect your other personal and business credit accounts if it’s reported to the credit bureaus. When creditors see you with a pattern of late payments to anyone else, you’re viewed as having a higher risk of defaulting, which could result in your accounts being terminated.
Alternatives To an Unsecured Startup Business Loan
Unsecured startup business loans can sometimes be difficult to qualify for, and they may not always have the lowest rates compared to other types of loans. If you’re having trouble getting a loan or want a cheaper source of funding, here are some other ways you can fund your startup:
- Rollover for Business Startups (ROBS): This allows you to access your personal retirement accounts tax and penalty-free to fund a business. It isn’t a loan, so you’ll be able to save money on interest fees. This is a complex transaction with tax penalties if done incorrectly, so it’s recommended that you use a highly rated provider such as Guidant Financial to walk you through the process.
- Loans from friends/family: If you can’t get approved for a loan from a bank, you can consider friends or family who are willing to loan you cash. They may also provide better rates compared to some lenders. You can read our guide on how to ask friends and family for a loan to avoid legal complications or relationship issues.
- Invoice factoring: This allows you to receive an advance on invoices that you’ve billed to clients but have not yet been paid. You can typically get funding for up to 80% of the unpaid invoice amount, and companies like FundThrough can also offer quick funding times.
Bottom Line
An unsecured startup business loan can be a great way to get funds to grow your business without pledging any business collateral. Having strong personal credit and a good business plan can improve your chances of getting a loan approval but rates can be higher compared to other types of loans, so it’s important to shop rates with multiple lenders and consider alternative sources of funding. You should also have a plan for using the funds in the most effective way to generate revenue and have alternative sources to repay the loan if you run into cash flow shortages.
