Unsecured business loans for startups are very rare because almost all lenders require collateral as a minimum qualification. The only unsecured business loans available for startups are typically personal loans or credit cards. The rates and terms on these types of loans are wide ranging, with APRs between 10% – 30% and terms up to 3+ years.
If you’re unsure whether or not an unsecured loan is right for your startup, talk to Guidant. They specialize in getting startups funded and can help you obtain unsecured loans for your business as well as a Rollover for Business Startups (ROBS), a penalty and tax free way of using retirement savings to fund a startup business.
The 4 steps to getting an unsecured business loan for your startup are:
1. Learn How an Unsecured Business Loan Works
Traditional lenders, like those who provide SBA startup loans, typically require business owners to pledge collateral – like real estate – in order to get approved for a business loan. With unsecured business loans, lenders don’t require you to come up with collateral to secure the loan. Instead, these loans are typically approved based on your personal credit profile and business performance.
However, while you’re not pledging assets directly, you do typically sign a personal guarantee that you’ll repay the unsecured loan. This means that if you fail to make payments, the lender could still go after your personal assets. What’s more, unsecured lenders sometimes won’t even fund you if you have a loan with another lender because they wouldn’t have first right to any business assets in the event you default.
For example, most small business lenders will take a first position on all business assets regardless of how many you have, but they won’t require you to provide your personal home equity as collateral to get through underwriting. They will, however, file a UCC lien on all business assets like equipment, accounts receivable, and inventory. If this is the case, unsecured lenders might not lend to you.
If you run into an issue where you have an existing loan, consider using a Rollover for Business Startups (ROBS) instead. A ROBS lets you use money in an existing retirement account to buy, invest, or grow a business. If you have at least $50k+ in a qualifying retirement account, speak with our preferred ROBS provider over at Guidant.
Unsecured Business Loan Rates
Unsecured loans typically cost more than traditional loans because the risk is higher for the lender. With a traditional loan from a bank you can expect to pay 5 – 10% in interest every year, but with an unsecured loan the interest rates can double, or more. Startups still favor unsecured loans because they either don’t have collateral or don’t want to risk their personal assets.
Unsecured business loan rates are typically:
- APR: 10% – 30%
However, one of the most expensive things about an unsecured business loan is coming up with the down payment. Many unsecured loans will require 10 – 30% down before you can get funded.
Luckily, there are startup loan experts like Guidant that can help you with both unsecured financing well as non-debt financing. A ROBS, for example, lets you rollover money in an existing retirement account and use it as a down payment, penalty and tax free. Setup a free consultation with Guidant to learn more.
Unsecured Business Loan Terms & Qualifications
The terms and qualifications vary based on the unsecured business loan provider you choose, but they’ll typically be similar to these ranges:
- Loan Amount: Typically only up to $50k, but can be as large as $500k
- Repayment Term: 1 Month – 3 Years
- Repayment Cycle: Weekly or Monthly
- Time to Funding: 1-3 Days
- Credit Score: 650+ (check your credit score for free here)
- Annual Business Revenue: Ideally $100k+
- Time in Business: Ideally 1+ year
The exception to these ranges is an SBA loan, which is more difficult to qualify for and more rare to originate without providing collateral. These loans typically require you to be a prime borrower with a 680+ credit score but have longer terms between 10 – 25 years and rates between 5% – 9%+.
However, while the SBA doesn’t technically require collateral, they do require that all SBA-approved lenders adhere to their own lending standards. This means that an SBA loan will often require collateral, and at the very least a personal guarantee. For more information, read our article on SBA startup loans.
Most unsecured lenders will ask you to sign a personal guarantee, which will essentially put up all of your personal assets as collateral. While the lender won’t itemize your assets and make them part of the underwriting process like a traditional secured loan, proving you have at least some assets could help them approve your loan.
Keep in mind that while lenders willing to originate unsecured loans don’t require collateral to approve you for the loan, they could still come after your personal assets if you default. Very few lenders, regardless of the type of loan you’re getting, will originate an unsecured loan without asking you to first sign a personal guarantee.
2. Evaluate Your Unsecured Business Loan Options
There are a few unsecured business loan options available in the market today, but they’re very limited for startups. Funding a startup is risky because there is no proof that you’ll succeed. Typically, a lender wants collateral to secure their interest in your business, and it can be more difficult to find an unsecured loan.
Many startups end up with the wrong financing for their business, which can create a strain on their company for years to come. According to David Nilssen, CEO of Guidant Financial:
“Startups are often undercapitalized when they start out. They don’t understand the true costs of a loan or the ramp up time. These are two of the biggest mistakes a startup can make. Often times we see borrowers who are looking for quick funding options that end up being expensive with high interest rates, down payments, and short repayment terms. The wrong financing choice ends up doing more harm than good in the long run.”
In order to get the right unsecured loan you’ll need to evaluate all of your possible options. These options really only include personal loans and credit cards, although technically you might be able to get an unsecured SBA loan, although not likely. An alternative option to these unsecured debts is to use a ROBS; we discuss it further below.
Unsecured Business Loan Options for Startups
|Personal Loans||Strong borrowers who only need up to $50k in financing.|
|Business Credit Cards||Every startup’s financial toolkit. Credit lines will typically be less than $20k.|
|SBA Loans||Prime borrowers who need a long term loan and have 25 - 30% to put down.|
|ROBS||Borrowers who don’t want a loan and who have $50k+ of retirement savings in a tax deferred account.|
Many startups are forced to find financing by only using their personal credit profile because the business either doesn’t yet exist or has very little revenue. Personal loans are smaller loans with competitive interest rates that you’ll be on the hook for 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.
Personal loans can be found at your local bank or through an online lender. You’ll typically be able to borrow up to $50k with a wide range in interest rates from 5 – 26% and repayment terms of 1 – 5 years. The time to funding can be as quick as 1 – 3 days with minimum qualifications of a 650 personal credit score (check your credit score for free here).
For more information, you can check out our article on the best startup business loans, including personal loans from peer-to-peer lenders.
Small Business Credit Cards
Business credit cards are easy to access and can be a cost effective way to fund your startup. Many small business credit cards come with rewards that pay you for using your cards every month. For example, you could receive up to 5% cash back on office expenses. While not recommended, business owners sometimes use “credit card stacking” as a form of unsecured financing.
Typical interest rates on a small business card can range from 14% – 24% and the minimum credit requirement is often listed at 680 (check your credit score for free here), but assuming 700+ as a floor is a good rule of thumb. These cards typically have lines that are less than $20k, although once you’re an established business you could get approved for up to $100k.
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.
Credit cards are likely the first form of financing you’ll be approved for, and if you have strong personal credit then they should probably already be a part of your financial toolkit. They’re right for everyone to use for everyday purchases, to pay for startup purchases, or to use for unexpected expenses as they come.
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 – 25 years with SBA loan rates between 4.71 – 9.25%. However, SBA loans are difficult to qualify for, especially if you’re a startup.
Typically, the SBA requires that all approved lenders take all available collateral – both business and personal – up to 100% of the loan amount. If collateral is not available, the lack of collateral itself is not a reason to decline the loan, making this technically an unsecured option. Still, if any collateral exists, the lender must take it.
What’s more, the SBA also requires that all lenders adhere to their own lending requirements when originating SBA loans. This means that the lender may still decline you for a loan if you have no collateral or take whatever collateral it can, even if it’s not 100% of the loan.
There are many different types of SBA loans, but each follows a similar application process that requires a lot of documentation and can routinely take 45 – 120+ days to get approved/funded. It’s important to be prepared for an SBA loan before you apply so that you can help speed up the application process as much as possible. You can learn more by reading our article on how to apply for an SBA loan.
Remember that when you get an SBA loan you have to satisfy both SBA loan requirements and the requirements of your lender. This means that while the SBA doesn’t specifically require collateral if you don’t have it, your lender probably will. You can learn more by reading our article on how to get SBA startup loans.
Rollover for Business Startups (ROBS)
We consider a ROBS to be the best kept secret in startup financing because it’s not a loan and there are no weekly or monthly payments that saddles 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. It’s a valid alternative to an unsecured business loan.
A ROBS is a really flexible piece of financing that can be used to start, buy, or grow a business. These funds can also be combined with other financing, like as a down payment for an SBA loan. Plus, your credit won’t be checked with a ROBS because there are no traditional minimum qualifications. You’ll just need to abide by all of the legal rules that come with a ROBS.
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 of the legal rules. Our recommended ROBS provider, Guidant, can work with you if you have $50k+ in a tax deferred retirement account. Setup a free consultation to learn more.
3. Determine Your Eligibility
Lenders offering unsecured business loans to your startup isn’t going to have a lot of information to go off of in order to determine your worthiness for a loan. The biggest factors determining your approval 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.
The most important things you must consider to determine your eligibility for an unsecured business loan are:
Personal Credit Score
The personal credit scores (check yours for free) of all business owners are vital in getting approved for any loan as a startup. This is the lender’s best idea of how secure their money will be in your hands until you pay them back because your credit score is a reflection of your financial responsibility. If you have a low credit score (below 650), then you could find yourself being automatically rejected by lenders as they process your application.
Since your credit score is key to getting approved, you should make sure you check your own credit score in advance of applying to see if you qualify. If your credit score is lower than expected, then you may be wasting your time and money by applying with unsecured lenders. You can also take the time to build or repair your credit if you know what it is in advance of applying.
The lower your credit is the more costly your loan will likely be, if you’re able to get approved at all. Having bad credit makes it difficult to get approved for an unsecured loan, but it doesn’t make it impossible. For example, if you’re a startup with some revenue you could qualify for a business loan without a credit check. However, if you’re still in the startup process and haven’t sold your products or services yet then you’ll have to improve your credit to qualify.
Since startups don’t have a lot of history – or any history at all – for lenders to go off of, you’ll need to make sure you have 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. If you’re creating it yourself then you should check out our article on how to write a business plan.
When creating your business plan make sure you include these key components:
- Executive summary
- The problem and your solution
- Product or services overview
- Target market
- Competitor analysis
- Business model
- Bios of your operations team
- Financial plan
- The ask (how much you want)
If you’d rather not do it manually and instead rely on software to do it for you, read our article on the best business planning software.
Some unsecured business loans require a hefty down payment instead of collateral. For example, SBA loans for existing businesses typically require a 10% down payment but SBA loans for startups can require as much as 25-30% down. Saving a down payment and using it to secure your loan is a good option for business owners that need to borrow more than $50k in financing, where many unsecured startup loans max out.
The problem for startups is that you either don’t have any capital – which is why you’re seeking financing – or your cash flow is probably too tight during the early stages of your business. It’s hard to part with 25-30% of the money you need because you don’t know how quickly your revenues will grow, but the alternative is that you’ll have to personally come up with the funds.
A good option for securing your down payment is to use a ROBS, which works well with SBA loans or other financing options. With a ROBS, you can use your retirement funds to pay for your down payment instead of trying to scrape together the funds by emptying your personal savings accounts, selling your assets, or taking on a second loan and further increasing your debt to income ratio.
A ROBS can help you access your retirement savings without paying early withdrawal fees or taxes, but it can be a complicated transaction. That’s why we recommend partnering with an experienced ROBS professional who can help you navigate the entire process. If you have $50k+ in a tax deferred retirement account you can speak with our recommended provider, Guidant, to learn more.
4. Apply for Your Unsecured Business Loan
Once you find the right lender and have determined that you’re qualified, it’s time to gather the right documentation and apply. The amount of paperwork you’ll need will be determined by what type of loan you’re getting. For example, an SBA loan requires a lot of paperwork, but a business credit card can easily be applied to online with basic information within a few minutes.
Let’s look at the 4 main types their application processes for unsecured business loans:
With personal loans, you’ll typically start by applying online and providing documentation proving you meet the specific lender’s standards. If you meet those standards, your loan will be put through the underwriting process to verify your financial qualifications to repay the loan. The entire process generally takes 3 – 7 days.
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 immediately give you an approval decision, or they’ll ask you for more information. If approved, you can get your business credit card in 3 – 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. If you’re interested in checking out the best business credit cards overall, head over to our guide on the best small business credit cards.
SBA loans can take 45 – 120+ days for startups to get funded due to a pretty onerous application process. You’ll likely need to work with a traditional lender who controls the underwriting process. Banks and traditional lenders are notoriously slow to approve loans, and they won’t rush a startup loan through by any means.
With an SBA loan you can expect to provide the following documentation at a minimum:
- Business plan with loan request amount
- Detailed allocation of funds
- Any current business financials
- Projected business financials for 1-3 years
- YTD profit and loss statement (if applicable)
- YTD balance sheet (if applicable)
- Cash flow statement with projections
- Any business or personal tax returns for the last 2 years
- Owner resumes
- Personal financial statement of all owners
- Any business licenses
You’ll also likely have to fill out a paper application to provide with all of this documentation and you’ll be asked for more detailed information as the underwriting process progresses. To learn more about the SBA loan process, you can read our article on how to get SBA startup loans.
Rollover for Business Startups (ROBS)
With a ROBS, you’ll typically be funded within about 2-3 weeks. Unlike either option above, this isn’t a loan and your personal credit won’t be checked. You’ll start by partnering with a ROBS provider who can help you through the process. That process has these five steps:
- You’ll need to setup a C Corporation for your business
- Create a 401k plan for your corporation
- Transfer funds from your personal retirement account to the company 401k
- The plan uses the funds to purchase stock in the corporation
- The business can then use the funds to buy a business, recapitalize the business, as working capital, or as a down payment for other financing
Alternative Unsecured Business Loan Options
Some loans are considered unsecured business loans because they don’t require you to put up physical collateral, like real estate, but the loan is backed by the asset you’re borrowing to purchase. These loans are available to businesses that are new, but not still in the ideation stage. You should have real business assets with some revenue or customer invoices before considering these options.
Alternatives to Unsecured Business Loans
|Equipment Financing||Businesses needing financing to purchase a large piece of equipment with a long shelf life.|
|POS Financing||Best for businesses who process a lot of payments through a POS provider like Square.|
|Angel and Venture Capital||Startups that expect to scale and want to give away ownership in return for capital.|
Equipment financing helps you purchase large pieces of equipment for your business by using the equipment itself as collateral. While this technically isn’t an unsecured loan, you don’t have to personally put up any collateral in order to get approved. If you default you’ll only lose the equipment you purchased with the money.
Equipment financing can be structured as either a loan, where you own the equipment at the end of your term, or a lease that lets you use the equipment for your loan period. You can learn more by reading our article on equipment loans or our ultimate guide to equipment leasing.
POS Financing is offered by the POS provider that processes your credit and debit card transactions. When you’re processing a certain level of daily receipts, which varies by provider, they will typically offer financing to you. These loans are typically for less than $100k and are capped at a certain percentage of the number of receipts you process annually.
Repayment terms are typically daily and automatically deducted from your POS revenue by your provider. Learn more by reading our article on Square Capital loans.
Angel & Venture Capital
Angel investors and venture capitalists are individual or entities that invest in startups in return for a percentage 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 times strategic guidance.
Angel investors and venture capitalists are really only a viable option for startups that exit to scale quickly and exit for a large sum of money. For more of us, this isn’t a viable option, but is interesting since it requires no collateral or even a personal guarantee, and is instead more similar to an asset sale. For more information, check out our article on the best startup business loans.
While it can be difficult to find an unsecured business loan for your startup, there are options available to you. The best one for you will depend on your creditworthiness, how much funding you need, and how much you have to put down.
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 loans for your business as well as a Rollover for Business Startups (ROBS), a penalty and tax free way of using retirement savings to fund a startup business.