Compare Small Business Loans
Starting up a business can be both expensive and risky. The cost of startup and growth might require an infusion of someone else’s cash, often in the form of a business loan. Other reasons for borrowing might include the purchase of equipment, an expansion of the products/services you offer, relocation to larger or more strategic location, and more. The riskiness of your enterprise puts some constraints on the kind of loan you can get and how much you can borrow. Unsecured loans do not require collateral, which means the lender must rely on your creditworthiness when deciding whether to grant you the loan.
- What Do Lenders Look For?
- How to Prepare for the Application Process
- Where to Get Unsecured Business Loans
What Do Lenders Look For?
From a lender’s point of view, the ideal business has a well-established cash flow and sales volume. Examples include established retailers, professional service firms, landscapers, and restaurants. On the other hand, startups, by their nature, have neither of those key ingredients.
That forces lenders to fall back upon the borrower’s personal credit history to underwrite an unsecured loan. And that, in turn, creates a problem for borrowers with bad credit who want to get an unsecured business loan on affordable terms. For example, the young owner of a software startup might have no credit history. A real estate developer who has experienced foreclosures will have poor credit, and would do better with a loan that’s secured by properties.
In the middle ground between secured and unsecured loans lies the personal guarantee loan, in which a borrower signs an agreement allowing the lender to put a lien on the borrower’s personal property in the case of default. Although a personal guarantee loan doesn’t require explicit collateral, it gives the lender the option to go to court and seek a judgment to attach your personal assets, like your car, bank account or home. That makes a personal guarantee loan an alternative for bad-credit borrowers who don’t qualify for an unsecured loan. Naturally, a secured loan would be easier to arrange, as the value of the collateral compensates a potential lender for the risk that you will default on your loan.
If you would like to obtain an unsecured business loan, consider two important steps before you apply:
1. Clean up your credit reports: You can raise your credit score by ridding your credit report of any mistakes. You can obtain free copies of your personal credit reports from the three big credit bureaus – Experian, Equifax and TransUnion – and dispute any errors that you find. You can also raise your score by paying your bills on time and paying down your existing debt. The same advice applies to your business credit report, assuming you’ve been around long enough to have one. The major business credit bureaus include FICO, Dun and Bradstreet, Equifax, Experian, FDInsight and Credit.net.
2. Get your business plan in shape: Spruce up this important document by ensuring it is complete, organized and convincing. A good plan, well-defended, can go a long way in persuading a potential lender to offer a loan to a startup business. Business plans should cover products and services produced in your industry and company, market research and a marketing plan, the economics of your business, your development, operations, and financial plans, risk assessment, management team and an overall schedule.
How to Prepare for the Application Process
Start by identifying several providers of unsecured business loans. The internet is a good source for this. For each lender, determine whether you meet the minimum requirements. Some lenders specialize in business loans to persons with bad personal credit. These lenders typically have no minimum required credit score, but often have other requirements, such as:
- A minimum amount of time in business.
- A minimum annual revenue or monthly cash flow.
- A business checking account.
Assuming you pre-qualify for a loan, check out the lender’s loan terms: How much is it willing to lend, for how long, and at what interest rate?
You’ll be asked to fill out an application, often online, that discloses information about yourself and your business. Be prepared to submit documents such as your recent tax returns, your business plan, and your financial statements (balance sheet, income statement). The lender will pull your credit reports and check your credit scores, both personal and business. Depending on the source of the loan, you might receive a decision within a day (online lenders), or it might take weeks (conventional banks). You can improve your chances by applying to several providers, but this might lower your credit score slightly.
You don’t have to admit defeat should your applications be rejected, as there are alternative ways to raise money:
- Apply for a personal guarantee business loan.
- Apply for a secured business loan.
- Apply for a loan guaranteed by the Small Business Administration.
- Take a credit card cash advance.
- Create a crowdfunding campaign.
- Seek equity capital from an angel investor or venture capital firm.
- Sell your invoices to a factoring company.
Where to Get an Unsecured Business Loans
Providers of unsecured business loans include banks, credit unions, commercial lenders, crowdlending platforms and peer-to-peer lenders. Here are the pros and cons of each:
|Bank||Low interest rates||Requires good credit, process can take a long time||Bank of America, Wells Fargo, state banks|
|Credit union||Very low interest rates, friendly service||Requires good credit, requires membership||Navy Federal CU, Insight CU, Associated CU|
|SBA-guaranteed||Low interest rates, low down payments, facilitates matching to lenders||Restrictions apply, including collateral required on loans above $25,000||SBA-approved lending partners|
|Commercial lenders||Easy and fast application, bad credit OK||Financial requirements, higher interest rates||Kabbage, LoanBuilder, IOU Financial|
|Peer-to-Peer (P2P) Lenders||Easy and fast application, bad credit OK, flexible terms||Interest rates can be high for borrowers with bad credit, no guarantee a lender will come forward||LendingClub, Prosper, Upstart, Funding Circle|