How to Get an Unsecured Business Loan

Whether you need to improve your cash flow or you’re ready to grow your business, getting outside funding can be a solution to your problem. It can be easier to qualify for secured business loans, but only if you have collateral available. If you don’t quite have the assets, this option is off the table. In this case, if you need business funding, unsecured options are available. Find out how to get unsecured business loans, different types of financing, and what to consider before applying.

What Is an Unsecured Business Loan?

An unsecured business loan is a financing option that doesn’t require collateral. While this can be a perk for borrowers who may not have personal assets to use as collateral, it’s riskier for lenders. Secured business loans have a built-in insurance policy for lenders, who can go after the collateral if you default on the loan.

Unsecured business loans allow business owners to get the financing they need without risking their assets.

How to Get Business Funding That’s Unsecured

If you’re looking for business funding, unsecured options can be challenging to get. Because borrowers don’t need to provide any personal assets or business assets as collateral, the lender assumes more risk.

That can affect your chances of approval and the interest rates on your loan. Having collateral for a secured business loan can make you a more appealing candidate to lenders. Plus, you may qualify for lower interest rates.

It’s not impossible to get business funding that’s unsecured though. But your creditworthiness, cash flow, and annual revenue will be under a microscope and will do a lot of the heavy lifting. To get started, here is how to get unsecured business loans.

1. Choose the Type of Loan or Financing

The first step is to choose the type of unsecured business loan you want. Each type of business financing or loan has different eligibility requirements, loan amounts, and pros and cons. Here’s an overview of common types of business funding that’s unsecured.

• Term loans. Unsecured term loans may be available from traditional banks, online lenders, and alternative lenders. Term loans provide business owners capital in the form of a lump sum. You pay term loans back on a specific term. Loan terms vary but could be between 12 and 60 months. Term loans are attractive as they can jumpstart your growth and smooth out any cash flow issues. However, to qualify for unsecured options you must meet strict eligibility requirements. Typically, larger loan amounts may require collateral.
• SBA loans. The Small Business Administration or SBA offers different loan options. Many SBA loans do have collateral requirements. But if you’re looking for business funding, unsecured options may be available if you need $50,000 or less with a 7(a) small business loan. SBA loans have a major advantage as they’re backed by the agency. This benefit lowers the level of risk for lenders, which helps support small business owners.
• Merchant cash advance. If your business relies on a high number of debit and credit card transactions, a merchant cash advance (MCA) could be a unique option for business funding that’s unsecured. The way it works is you get a lump sum upfront. If your credit score doesn’t quite meet the underwriting criteria for traditional loans, MCAs may be a solid alternative.
• Invoice factoring. If your business model uses invoices for clients' payments, you may be able to leverage your outstanding invoices into cash. This type of financing involves selling unpaid invoices to a factoring company. The company pays you around 80% to 90% of your invoice total upfront. They take on the responsibility of collecting payments. When the invoices are paid, the factoring company will give you the remaining funds, after taking out a fee of 1% to 5%.
• Business credit card. If you don’t qualify for an unsecured business loan, an alternative option for business funding that’s unsecured is a business credit card. Business credit cards can help you establish a business credit history and potentially earn rewards. This is a great short-term financing option but can have a long-term impact if you’re not careful. The higher interest rates can make it challenging to climb out of debt.
• Unsecured business line of credit. Another option that’s more similar to a credit card than a loan is an unsecured business line of credit. You’re approved for a credit limit amount and can use up to that amount. But unlike a lump sum, you have the flexibility to use only what you need. The available credit limit resets as you pay it back.

If you need business funding, unsecured options come in different forms. Whether it’s a traditional loan or a line of credit, you can choose something that fits your industry and business needs.

2. Know How Much You Want to Borrow (and Can Afford to Pay)

Before applying for any business funding that’s unsecured, do your homework and calculate how much you want to borrow. Your lender will want to see your business plan and have a clear idea of what you’re using the loan funds for.

Be specific with your budget estimates so you don’t borrow more than you need. Additionally, review your cash flow and make sure you can afford the monthly payments on the loan. While your startup might need the funds for its next phase, you don’t want it to backfire and hurt you in the long run.

3. Check Your Credit

If you need business funding, unsecured options will rely heavily on your creditworthiness. Lenders might look at both your personal credit score and business credit score (if applicable). To qualify for unsecured business lending, you generally need a credit score of 600 to 680 or above.

Your credit score is more important for unsecured loans as there’s no collateral for the loan. Before applying, check your credit to see where you stand. It can also help you identify any errors.

Banks and credit cards may offer you free access to your credit score. You can view your personal credit reports from all the major credit bureaus at AnnualCreditReport.com. If you spot any mistakes, it’s important to rectify them before submitting any applications for credit. You can check your business credit reports on Dun & Bradstreet, Experian, and Equifax.

4. Review Goals and Timelines

The next step is to review your goals and timelines. This can affect the type of financing you get and also the lender. For example, if you need fast funding then an SBA loan of $50,000 or less (to be unsecured) probably isn’t the best fit.  

Online and alternative lenders typically have much faster timelines.

5. Compare Lenders

After reviewing the types of unsecured business financing, goals, and timelines, it’s time to compare lenders. Business funding that’s unsecured may come from banks, credit unions, or online lenders. Small business owners should look at all their options and look at the following:

• Eligibility requirements. Check for minimum credit score, annual revenue, and time in business requirements.
• Interest rates. Look at interest rate ranges and compare fixed vs. variable options.
• Repayment terms. Review repayment terms for each loan product and lender. This will dictate how long you’ll have to repay the loan. It also determines the size of your monthly payments.
• Funding timelines. Find out average funding timelines. If you need fast funding to meet your business goals, make sure the lender can deliver.
• Fees. Read the fine print and look for origination fees, prepayment penalties, or other fees which can add to your loan costs.
• Application process. Review the application process, what documents you must provide, and approval timelines.

These factors can help you decide which lender offers the best business funding for your situation.

6. Collect Supporting Documentation

After selecting the lender of your choice, collect supporting documentation for your application. When looking for business funding, unsecured options are tougher to get. So, you want to provide as much information as possible to show you’re a desirable candidate. Supporting documentation can include:

• Tax returns
• Bank statements
• Profit and loss statements
• Balance sheet
• Business plan
• Personal credit report
• Business credit report
• Driver’s license
• Business license

7. Go Through the Application Process

After collecting your supporting documentation, go through the application process. Don't skip any sections and double-check your application before you submit. Not including all the information or documentation could lead to delays, or worse, getting rejected. When applying for business funding, unsecured options are typically available online.

8. Get Funds

Once your application for an unsecured business loan is approved, you can receive the funds. Typically, the sum goes to your business bank account. Approval and funding timelines vary, so check with the lender ahead of time. After receiving the funds, you can use the money to execute the next steps to help your business grow.

9. Manage Repayment

Business funding, unsecured or secured, requires repayment. Once you get the loan funds, make sure you’re on top of your monthly payments. Managing repayment successfully can help you stay in good standing and build your business credit. All of which could help you down the line if you need additional financing.

While you may have applied for a loan for your business, be aware many lenders need a personal guarantee from you. So, it’s not just the business that’s on the hook for repayment, but you are as well. If you fail to make payments and end up in default, it could spell trouble for you and your business. Not only are you at risk of having the loan go to collections, but you could face legal action by the lender as well.

Final Thoughts

If you’re looking for business funding, unsecured options can be appealing. You don’t need to put your assets at risk, and you can still get the financing you need. On top of that, you have many different choices. Using the steps mentioned above, you can go through the process to get an unsecured business loan. Be aware of potential risks and understand how you’ll use the funds to further your business.

FAQs about Business Funding That’s Unsecured

Can I Get Business Funding with Bad Personal Credit?

You may qualify for business funding with bad personal credit, depending on the lender’s eligibility requirements. However, if you’re looking for business funding, unsecured options may be tough to get. Whether you qualify for secured or unsecured business funding, bad credit generally means having higher interest rates.

How Do I Take Out a Business Loan?

You can take out a business loan by researching multiple lenders, reviewing eligibility requirements, requesting a loan amount, and providing supporting documentation.

What Happens If You Can't Pay Back an Unsecured Business Loan?

If you can’t pay back an unsecured business loan, you should discuss options with the lender immediately. Not making payments can lead to default, which can harm your credit. Additionally, the loan may be sent to collections, and the lender may take legal action.

Does the SBA Offer Business Funding with Unsecured Options?

The Small Business Administration offers limited business funding with unsecured options. In fact, the majority of SBA loans require collateral. However, with the 7(a)-loan program, loan amounts of $50,000 or less may not require any collateral.

What are Some Ideal Business Funding Options for Unsecured Loans?

Some of the options for business funding that’s unsecured include some term loans, merchant cash advances, invoice factoring, and business credit cards. However, you must meet the lender’s eligibility requirements to qualify without collateral.

What Are Alternatives to Unsecured Business Loans?

Alternatives to unsecured business loans include secured business loans, crowdfunding, peer-to-peer lending, and getting funds from friends and family.

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