Disclaimer: Information in the unsecured business loans articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the unsecured business loans articles often covers financial products that Biz2Credit does not currently offer.

A good credit score is one of the most important criteria when a small business owner seeks business financing. Especially when it comes to unsecured small business loans and unsecured business lending.

With good credit, you’ll be able to secure more favorable terms, including lower interest rates. Without good credit, you will likely pay more for your financing, or worse, you won’t be approved for unsecured financing at all.

What is Unsecured Business Lending?

An unsecured business loan is any business financing not secured by collateral.

Small business financing includes a wide spectrum of options, including commercial real estate financing, equipment loans, business lines of credit, term loans, merchant cash advances, and revenue-based financing. But not all of these can be unsecured business loans. For example, commercial real estate loans are always secured since the funds from the loan are used toward the purchase of assets that become collateral for the loan. And while lines of credit can be secured or unsecured, they aren’t actually loans—they function more like a business credit card.

Because unsecured business funding options aren’t backed by business assets, the risk to the lender is more significant. So unsecured business finance typically comes with more robust eligibility requirements, including a strong business credit score and credit history. Some lenders will also require a personal guarantee.

What is a Personal Guarantee?

A personal guarantee is a standard provision of many unsecured business loans. If the borrower defaults on the loan, the lender can hold the business owner personally responsible for repaying the loan.

If you apply for unsecured business lending and sign a personal guarantee, you may have to use personal assets, such as equity in your home or personal savings, to satisfy the debt if your business can’t repay the loan.

How Do Credit Scores Impact an Unsecured Business Loan?

With most types of small business funding, an excellent credit score will increase your odds of approval and generally help you get better terms for your loan, regardless of your lender.

With unsecured business lending, most lenders require a minimum credit score of 600 to 680. The Small Business Administration (SBA) requires a credit score of at least 615 for SBA 7(a) and 504 loans.

Some loan providers, including alternative and online lenders, may accept scores as low as 575 for certain types of small business loans.

There are other factors at play in terms of loan approval. These include:

• The type of loan, loan amount, and what it’s used for
• Time in business
• Annual revenue
• Down payment amount
• Debt-to-income ratio

For unsecured business funding, most lenders look for a solid business history with at least 2 years in business, a good personal credit score, strong business credit history, and debt-to-income ratios below 40%.

These criteria are not set in stone. Some lenders might be willing to offer unsecured business funding to a business owner whose only been operational for a year if their credit score is very high. If you have a low credit score, a lender might require more time in business to approve an unsecured loan.

If your credit score is lower and your debt-to-income ratio is not as high as the lender would like, they may also stipulate that a personal guarantee is needed to approve the loan.

How to Get Unsecured Business Financing

Decide what type of unsecured business lending works best for your business needs

The primary types of unsecured business loan options include:

SBA loans

SBA loans are backed by the Small Business Administration and processed by traditional financial institutions like banks and credit unions. The SBA offers unsecured loans of $50,000 or less.

• Works best for:
  • Small businesses looking for unsecured loans for fair credit and that have difficulty getting approved for traditional funding
  • Businesses that don’t need fast funding (SBA approval can take up to 90 days)
  • Small business owners looking for long repayment terms and lower interest rates

Term loans

An unsecured term loan will give you one lump sum upfront towards a specific purpose, such as working capital or covering slow seasons. Then you repay the loan in equal monthly payments over the loan term.

Small business owners can get a term loan from a traditional lender or an alternative lender.

• Works best for:
  • Larger, one-time short-term expenses
  • Small business owners looking for flexibility in their unsecured business loan (repayment can range from 24 months to 10 years, depending on the lender)
  • Business owners exploring unsecured loans for good credit and who prefer fixed payments with fixed interest rates

Non-Loan Options:

Business lines of credit

With a business line of credit, you’re approved at a specific credit limit and can borrow from it as needed. Business lines of credit work like a business credit card where you only pay on the amount of credit you utilize. The available credit is replenished by any amount paid back, allowing you to borrow from it again as needed.

• Works best for:
  • Flexible funding that can cover many types of business expenses
  • Businesses that need to borrow funds regularly, such as to cover cash flow or working capital deficits
  • Business owners improving their creditworthiness

Revenue-based financing

• With revenue-based financing, a lender loans you money, and repayment is based on a percentage of your future revenue or sales. The primary benefit is that it’s typically easier to qualify for this form of financing.
• Works best for:
  • Businesses in need of very fast funding (sometimes within a couple of days)
  • Small business owners with bad credit scores or startups having problems qualifying for traditional funding
  • Business owners who want to avoid signing a personal guarantee or provide collateral

Note that many of the lending options we mentioned can be offered as secured loans as well.

It’s prudent to have your financial statements ready to disclose for a lender. Each lender will have different requirements regarding this, and having them readily available can potentially speed up the process.

Required documentation can potentially include:

• A business plan
• Bank statements
• Copies of tax returns
• Income and cash flow statements
• Balance sheets
• Account receivables and payables
• A copy of your business license
• Business formation documents

It’s also helpful to get a copy of your credit reports and understand your options.

Determine funding amount needs

Outline how you plan to use the loan funds and decide how much you need. Then, estimate the loan payments to determine if your business can afford the new debt. It helps to partner with a small business loan expert to guide you at this point.

Decide how fast you need the funding

If you need funding within a few days, you’re not likely to get it with a traditional lender. An alternative lender can potentially help you receive your funds in a short time frame. If you have time on your side and have good credit, it an SBA loan or term loan with a bank or credit union may be a better option.

Compare and research unsecured business loan lenders

Once you know which type of loan will work best and which lenders can facilitate your needs, research and compare reputable lenders.

Consider the following when comparing unsecured business lending providers:

• Eligibility requirements: Ensure your business meets loan requirements to avoid wasting time during the loan application process. The lender’s three primary criteria are likely your credit score, time in business, and annual revenue requirements.
• Rates and fees: Interest rates can vary from lender to lender. Factor in the total cost of the loan, which includes the total interest and all loan fees, including origination fees.
• Repayment terms: Some lenders won’t offer loan repayment periods beyond two years, while others will go longer. Determine what works best for you to meet your obligation on the loan. If you decide on something like revenue-based financing, find out if the lender requires daily, weekly, or monthly payments. This can make a significant difference in paying back the loan
• Personal guarantee requirements: Some lenders will still require a personal guarantee when issuing an unsecured business loan. Since this comes at a personal risk to you, if you have a reputable lender who offers business loans without personal guarantees, it makes sense to get your loan through them.

Apply for your unsecured business loan

Once you’ve done your due diligence, go through the unsecured business lending process with a loan provider that works best for your business. After you’ve applied for your loan and have been approved, make sure to read the loan agreement before signing.

Foster a good working relationship with your lender, ensuring that you feel comfortable asking questions and getting the answers you need to feel confident about your unsecured business loan.

FAQs

What are the best unsecured business loans?

The best unsecured loan is one that works best for you, provides funding when you need it, and doesn’t require a personal guarantee.

How much influence does my credit score have when I apply for a business loan?

With a secured business loan where there’s collateral, a credit score won’t have as much bearing on getting approved as much as it will with an unsecured loan. A good credit score will also help you get a better rate on your loan and may help you avoid having to sign a personal guarantee.

Is it hard to get an unsecured business loan?

It can be harder to qualify for than a secured loan since there’s no collateral, particularly if you have bad credit. But if you otherwise have solid financials, it can be easier than you think, particularly with alternative lenders.

Is there a maximum loan amount with an unsecured loan?

Many lenders have a ceiling of $50,000 for unsecured loans. This can vary. Some will loan more with a personal guarantee or a high credit score.

What is the interest rate in unsecured business lending?

Interest rates on unsecured loans will vary based on your credit score and other factors.

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