There is an inherent risk in lending to a startup, which is why unsecured business loans for startups are rare. Lenders typically protect themselves by requiring collateral. If you’re seeking an unsecured business loan, you should understand how they work, what your options are, and what the qualification requirements are before applying. The rates and terms on these types of loans are wide-ranging, with APRs between 9% and 30% and terms up to three years.
The four steps to getting an unsecured startup business loan are learn how an unsecured startup business loan works, evaluate your unsecured startup business loan options, determine your eligibility, and apply for your unsecured startup business loan.
1. Learn How an Unsecured Startup Business Loan Works
Traditional lenders typically require business owners to pledge collateral—like real estate—to get approved for a business loan. With unsecured startup business loans, your business is approved based on your personal credit profile and business performance rather than collateral. You’ll likely need to agree to a UCC lien on your business assets and provide a personal guarantee.
A UCC lien is a claim against your business by the lender under the Uniform Commercial Code. While this isn’t collateral, per se, it allows the lender to seize assets or revenues if you default on the loan.
When approving unsecured business loans for startups, lenders often require businesses to:
- Pledge business assets directly: A UCC lien covers all business assets like equipment, accounts receivable, and inventory. Your lender can go after these assets in the event of a loan default.
- Provide personal guarantees of owners: If your business doesn’t pay back the loan as agreed, you will be held personally liable for repayment of the loan.
- Indirectly pledge personal assets of owners: The lender can use the personal guarantee to pursue your personal assets indirectly to recoup losses in the event of default. However, some states limit the recourse and number of actions a lender can take.
2. Evaluate Your Unsecured Startup Business Loan Options
Funding a startup is risky because there is no proof of concept or success. However, there are still a few options in the market today for unsecured startup financing. Understanding these options helps business owners ensure they don’t get the wrong type of financing, which can create a strain on their company for years to come.
There are four common options for unsecured loans for a startup businesses: personal loans, small business credit cards, Small Business Administration (SBA) loans for startups, and rollover for business startups (ROBS).
One of the most common ways to get an unsecured startup loan is to seek a personal loan based on your own credit profile and income. This is because a new business has no assets and no revenues to use in determining eligibility. These loans are often smaller with competitive interest rates but keep business owners on the hook personally if the business is unable to pay the money back.
When you take out a personal loan, you’ll sign a personal guarantee that will put all of your personal assets at risk, including your personal home. While this sounds like you’re using collateral in this type of funding arrangement, your assets don’t factor into the approval of your loan. Instead, they’ll look at your personal credit profile and how you plan to spend the money.
Small Business Credit Cards
A small business credit card is an unsecured revolving credit line that allows business owners to spend funding on business expenses as needed. The best startup business credit cards are easy to access and can be a cost-effective financing method for your new businesses. Many small business credit cards come with rewards that pay you for using your cards every month.
One benefit of using a business credit card is that you only pay interest on what you owe at the end of your billing cycle, so if you pay off your card every month, you won’t be charged anything for using the credit line. Some cards come with an annual fee, and you should make sure you understand any potential fees before you apply.
SBA Loans for Startups
SBA loans are one of the most sought-after small business loans because of their low interest rates and long repayment terms. They’re a good fit for working capital to help grow your business because they typically have repayment terms of 10 and 25 years, with SBA loan rates between 7% and 11%. However, SBA loans are difficult to qualify for, especially if you need unsecured business funding for a startup.
Remember that when you get an SBA startup loan, you have to satisfy both SBA loan requirements and the requirements of your lender. Typically, the SBA requires that all approved lenders take all available collateral—both business and personal—up to 100% of the loan amount. This means that while the SBA doesn’t specifically require collateral if you don’t have it, your lender can.
A ROBS is a flexible piece of financing that can be used to start, buy, or grow a business. We consider a ROBS to be the best-kept secret in unsecured business funding for startups because it’s not a loan, and there are no weekly or monthly payments that saddle your company with debt. Instead, a ROBS helps you get access to funds in a tax-deferred retirement account, without paying early withdrawal penalties or taxes, to be used for business purposes. These funds can also be combined with other financing, such as a down payment for an SBA loan.
Since a ROBS can be a complicated transaction, we recommend you work with an experienced ROBS professional who can help you make sure you abide by all the legal rules. A ROBS provider, like Guidant, can work with you to set up a ROBS and ensure that you are meeting all of the legal and tax requirements.
3. Determine Your Eligibility
Lenders have to determine your eligibility to qualify for an unsecured business loan. This is difficult for startups because a new venture doesn’t have a track record of revenues or assets to consider when evaluating loan qualifications. As such, the biggest factors determining if you can get unsecured business funding for your startup are going to be your personal credit score and the credit score of other business owners, your business plan, and how much money you have to contribute to your business.
Personal Credit Score
Having a credit score 650 or more is imperative to qualify for an unsecured business loan. This is the lender’s best idea of how secure their money will be in your hands until you pay them back since your credit score is a reflection of your financial responsibility. If you have a credit score below 650, then you could find yourself being rejected automatically by lenders as they process your application.
To give yourself the best shot at qualifying, check your credit score prior to applying. If you find that your credit score is lower than required, see what you can do to improve your score or find a partner who will meet the eligibility criteria. Remember that the lower your credit score is, the more costly your unsecured startup loan will likely be―if you’re able to get approved at all.
More than credit is required when seeking an unsecured startup loan. The lender will want to see the business viability, and this is demonstrated via a sound business plan. Any potential lender will want to see that you’ve thought through the process of what your business offers, what makes it unique to your industry, and how you plan to obtain customers.
When creating a business plan, it’s important to include financial projections that show how you plan on using the capital and how you expect the business to perform. Creating the right business plan can be time-consuming, and it can be frustrating trying to figure out what to include.
When creating your business plan, make sure you include these key components:
- 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 you need to borrow (the ask)
There is technically no down payment required on unsecured business loans. However, some unsecured loans, like SBA loans, require you to invest a certain amount of money in the project or business for which you’re seeking funding, similar to a down payment. For existing businesses, this equity requirement is typically 10%. However, SBA loans for startups can require a contribution as large as 25% to 30%. This shows lenders that you’re invested personally in your business venture.
4. Apply for Your Unsecured Startup Business Loan
Depending on the loan type you decide on applying for, find an appropriate lender. Once you find the right lender and have determined that you’re qualified, it’s time to gather the right documentation and apply. The application process may vary depending on the type of loan you are seeking. For example, an SBA loan requires a lot of paperwork, but a business credit card can be applied easily for online with basic information within a few minutes.
A personal loan application can take three to seven business days to process. Often, you can start the application online and upload the documentation to the loan representative.
With a personal loan, you’ll be asked for the following documentation:
- Verification of income
- List of monthly expenses
- Social Security number (your credit will be checked)
- Use of funds
Business Credit Cards
With a business credit card, you’ll likely be able to apply online by providing basic personal and business information. The provider’s online system will analyze your profile and either give you an approval decision immediately, or they’ll ask you for more information. If approved, you can get your business credit card in three to 10 days.
The information you’ll provide during the application process typically consists of:
- Business name
- Business revenue
- Business tax ID number
If you’re interested in applying, check out our article on the best startup business credit cards.
SBA loans can take 45 to 90 or more days to get funded due to a pretty onerous application process. You’ll likely need to work with a traditional lender at a local bank who controls the underwriting process.
With an SBA loan, you can expect to provide the following documentation at a minimum:
- Business plan with a loan request amount
- Detailed allocation of funds
- Any current business financials
- Projected business financials for one to three years
- Year-to-date profit and loss statement, if applicable
- Year-to-date balance sheet, if applicable
- Cash flow statement with projections
- Any business or personal tax returns for the last two years
- Owner resumes
- Personal financial statement of all owners
- Any business licenses
You’ll also likely have to fill out a paper application along with all of this documentation, and you’ll be asked for more detailed information as the underwriting process progresses.
Remember that a ROBS is not a loan but an alternative means to fund your startup using existing retirement funds. With a ROBS, you’ll typically be funded within two to three weeks. Start by partnering with a ROBS provider who can help you through the process.
The ROBS process has these five steps:
- You’ll need to set up a C-corporation (C-corp) for your business.
- Create a 401(k) plan for your corporation.
- Transfer funds from your personal retirement account to the company 401(k).
- The plan uses the funds to purchase stock in the corporation.
- The business can then use the funds to buy a business, to recapitalize the business, to use as working capital, or to use as a down payment for other financing.
Alternatives to an Unsecured Business Loan for Startups
Business owners must be resourceful when it comes to funding. This might mean looking at alternatives to unsecured business loans. These alternatives may be suitable for a new business but may require some revenues or assets to exist in the company.
Equipment financing helps you purchase large pieces of equipment for your business by using the equipment itself as collateral. This financing can be structured as an equipment loan, where you own the equipment at the end of your term, or an equipment lease that lets you use the equipment for your loan period. Both use your equipment as collateral, so you lose the equipment if you default.
Point-of-Sale (POS) Financing
POS financing—sometimes referred to as merchant financing—is offered by the POS provider that processes your credit and debit card transactions. This requires you to have a minimum amount of daily receipts, so this is not for the brand new business with no revenues. POS financing providers typically lend less than $100,000, and the financing is capped at a certain percentage of the number of receipts you process annually. Repayment terms typically are daily and deducted automatically from your POS revenue by your provider.
Angel & Venture Capital
Angel investors and venture capitalists are individuals or entities that invest in startups in return for a percentage ownership stake in that company. This type of financing is called “equity financing,” and technically isn’t a loan at all. Instead, you effectively sell a portion of your company to an outside investor in return for capital and, often, strategic guidance. Angel investors and venture capitalists are only a viable option for startups that exist to scale quickly and exit for a large sum of money.
Getting an unsecured business loan for your startup requires having good credit as well as potentially having assets other than real estate to offer as collateral. Some lenders may require a down payment, especially if you are using an SBA-approved program. Make sure you have a solid business plan that shows lenders a great business case to approve the loan.
We understand that unsecured business loans may or may not be right for you, which is why we recommend talking to a startup loan expert like Guidant. They specialize in getting startups funded and can help you obtain unsecured business loans for your business as well as a ROBS, a penalty-free and tax-free way of using retirement savings to fund a startup business.