A staggering eight in 10 businesses — that’s how many fail because of cash flow mismanagement.
Improper management of cash flow ultimately leads to running out of funds. This end result is why 29% of businesses failed.
Despite these failures, 400,000 new businesses still open each year (or at least from 2009 to 2016). This trend is likely to continue, thanks to the increase in business lenders.
Today, getting an unsecured business loan for a startup has become simpler. While the rejection rate is still high, you now have more business lenders to choose from. You also have the Internet to thank, since many lenders now operate online.
Ready to learn more about how you can get an unsecured loan for your startup? Then let’s get right into it!
Understand the Basics of an Unsecured Business Loan for a Startup
An unsecured loan is a loan that doesn’t require the borrower to pledge collateral. In the personal loan industry, these are the most popular type of loans. They’re so popular that in the first quarter of 2019, Americans owed $143 billion in these loans.
Unsecured business loans work almost the same way, as they don’t require collateral. For existing businesses, however, lenders look at the business’ credit profile and performance. With unsecured personal loans, the lenders look at the borrower’s personal credit score.
What about businesses that haven’t launched yet, seeing as they have yet to build a credit profile? In this case, lenders need to consider the borrower’s personal credit score. Some lenders may also require the borrower to have a co-signer if they don’t want to pledge collateral.
Prepare Guarantees of Repayment
Even if you’re applying for an unsecured loan, you should still come up with a guarantee of repayment. This will help increase your chances of getting approved for an unsecured loan.
Personal Credit Score
In 2019, the average FICO Score in the US went up to 703, representing a 2-point increase from the year before. This the highest it has been since 2010.
If your personal FICO score is in good shape, then make sure it stays that way. This may be enough proof for lenders that you can pay back your business loan without collateral.
Be sure to request a copy of your credit profile before you apply for a business loan. Your credit report has a one-in-five chance of containing errors that can lower your score. A credit report copy is free, and it’ll help you ensure that your report is flawless.
As the owner of the business, lenders may allow you to take out a loan under a personal guarantee. In the event that you can’t pay back the loan, this guarantee will hold you personally liable. You’d have to use your personal finances to repay the business loan.
Develop a Solid Business Plan
Almost all lenders require a business plan from the borrower. They will use this to gauge just how financially-sound your firm will be in the years to come. Lenders would need to know what your business will offer, if it’s unique, and how you plan to acquire clients.
In short, you need to create a business plan highlighting your business’s creditworthiness. This document can make or break your application since there’s no collateral involved.
A business plan starts with an executive summary and product or service overview. It should explain the problems that your products or services aim to solve. You should also summarize your target market and how you plan to beat your competitors.
Discuss your business’ short- and long-term financial plans too. Aside from indicating how much you want to borrow, explain why you’re borrowing such an amount. All these will make it easier for lenders to gauge your repayment ability.
Compare Your Startup Business Loan Options
Most unsecured loans for businesses include SBA loans and online business loans. An unsecured personal loan may also help jumpstart your startup’s finances.
Small SBA Loans
In 2019, the Small Business Administration (SBA) approved a total of 51,907 7(a) loans. Together, these loans amounted to a whopping $23.2 billion.
7(a) loans are the most common and popular SBA loans, thanks to their low-interest rates. Moreover, these loans don’t require collateral, so long as the amount doesn’t exceed $25,000. For higher-amount loans, some form of collateral is already required.
Unsecured Online Business Loans
Fintechs are online lending institutions that offer small business loans to startups. The majority of fintech programs don’t require borrowers to pledge collateral. Moreover, they have more relaxed lending standards and fewer overall requirements.
Keep in mind, however, that the interest rates of online business loans are higher than SBA loans. Still, they’re a good choice if you don’t qualify for an unsecured SBA loan. They will also let you borrow a bigger amount without the need for collateral.
Unsecured Personal Loans
Unsecured personal loans are those that you take out under your own name and credit score. Since you can use the loan proceeds in any way you want, you can use them for your business.
Explore All Your Options to Find the Best Funding Source for Your Startup
As you can see, there are quite a few steps to getting an unsecured business loan for a startup. One of the most crucial is to prove that you can repay your loan, which is why a good personal credit score can help. Don’t forget alternative lenders, as they usually have more lenient lending standards.
What’s important is to take your time in comparing all your loan offers and options. Weigh the pros and cons of each funding program so you can pinpoint those that will help your business grow. Your goal is to make profits and not just pay back your loans (and interest), after all.
Ready for more tips to get your business on the right financial track? Then be sure to check out the rest of the posts under the Business/Financial section!