What are some of the most important things that you will need to know when applying for unsecured business loans for startups? Continue reading to learn more!
Startup funding can make the difference between you getting your ideas off the ground – or momentum coming to a halt. Unfortunately, it’s not always easy for new businesses to get their hands on capital. This is especially true when it comes to unsecured business loans.
Unsecured business loans are loans that don’t have collateral requirements. In other words, you won’t need to pledge your personal or business assets in exchange for financing. This can be beneficial for a number of reasons.
First, you may not own enough high-value assets like real estate or equipment that can be used as collateral. Second, you won’t be at risk of losing those assets in case things go south and you’re struggling to repay your debt. Unsecured business loans allow you to avoid this worst-case scenario.
Because they can be heavily sought-after – unsecured business loans are sometimes hard to qualify for. It helps to understand how the funding process works and which requirements you’ll need to provide.
Unsecured business loans for startups are certainly possible to obtain – and you do have plenty of options.
Here’s a step-by-step guide on how to get them.
1. What are the best options for unsecured startup business loans?
There are many different types of startup business loans – and a good amount of them are unsecured. Some of the best options for unsecured startup business loans include Rollover for Business Startups (ROBS), credit cards, personal loans, crowdfunding, SBAs, merchant cash advances and more.
Take a look at how different types of unsecured startup business loans compare.
1.1. Rollover for Business Startups (ROBS)
A rollover for business startups (ROBS) allows you to leverage funds from your 401(k) or individual retirement account (IRA) without having to pay early withdrawal penalties or taxes.
This can be a popular, unsecured form of business financing. Not least because you’ll be using your own savings so they’ll be no debt to repay. However, the downside is that your retirement savings will take a hit.
Unsecured business loans for startups: ROBS graphic. Source: guidantfinancial.com
1.2. Credit cards
Another way to get unsecured startup business loans is through credit cards.
You can use either business or personal cards to cover a number of different expenses. Plus, if your credit is good, you may even be able to access certain benefits, such as a temporary promotional 0% APR period.
Unfortunately, credit cards typically feature smaller funding amounts, which may not make them an adequate source of financing for all types of business expenses. Plus, they come with high-interest rates.
1.3. Personal loans
If your credit is good and your finances are in order, you may be able to take out a personal loan to fund your startup. Keep in mind that most lenders will also want to see proof of income for personal loans.
Although this funding type can be helpful, you’ll still be personally liable for the loan if you are unable to repay it.
1.4. Friends and family
If your personal network has enough capital to invest, it may be worthwhile to pitch your business idea to your friends and family. In fact, this is one of the most common ways for startups to initially raise capital.
If you decide to go this route, make sure to lay out the conditions of each offer in writing to minimize confusion and potential conflicts.
1.5. Crowdfunding
One of the most popular ways to get unsecured business loans for startups is through crowdfunding.
Platforms like Kickstarter and Indiegogo have opened up new ways for businesses to raise capital. Crowdfunding allows you to raise small amounts of money directly from many different investors.
In exchange, investors will typically receive equity as repayment for funding your campaign. Crowdfunding is fast and straightforward. However, it does force you to give away equity in your business, which can create valuation problems or threaten your control down the line.
1.5. Merchant cash advances
Merchant cash advances, also called merchant financing, offer an upfront lump sum of capital repaid via a percentage of your business’s future credit card sales. In this way, merchant cash advances are not exactly a loan. Instead, they’re an advance on your business’s future sales.
Merchant cash advances feature high approval rates, fast funding times, and can also be used to fund almost any type of business expense. With this type of financing, lenders will heavily weigh on your business’s revenue – while your time in business and credit score will matter less.
The downside is that merchant cash advances come with high-interest rates, which can cut into your daily sales. This is why they are generally best reserved for short-term needs.
1.6. Small business administration loans
SBA loans have many benefits, including low-interest rates, high funding amounts, long terms, and more. Despite these perks, SBA loans generally have strict requirements. Oftentimes, you’ll need to provide collateral in order to secure funding. However, there may be some exceptions to this rule.
Some SBA loans are catered to startups and minority-owned businesses, so depending on your qualifications you may be able to get an SBA loan without collateral. Make sure to reach out to an SBA-approved intermediary lender or National for more information.
1.7. Equipment loans
Depending on the type of industry you work in, you may need to buy equipment in order to launch operations. This could mean vehicles, heavy machinery, or more. Equipment loans help you finance these heavy assets and buy the basic supplies you need to launch your business.
That said, equipment loans are technically backed up by collateral. The underlying difference is that the very asset you are financing will serve as collateral for this loan. Mortgages and commercial real estate loans also work this way.
With these types of financing, it’s unlikely you’ll need to forfeit personal assets in the event of a default. Instead, the lender will simply repossess the very equipment you were financing.
2. What are the requirements for unsecured business loans for startups?
The requirements for unsecured business loans for startups will vary depending on the funding option that you choose, and different lenders may put more weight on some requirements over others. However, the most common ones include your personal and business credit history, all business financials, legal documents, and a detailed business plan.
Here is a full list of what you should expect to be asked for no matter which lender you decide to work with:
- Both personal and business credit history
- Business financials including bank statements, tax returns, balance sheets, etc.
- Detailed business plan including industry risk analysis and growth potential
- Legal documents, including business licenses and registrations
- Financial history, including bankruptcy or liens
3. Explore lenders for unsecured business loans for startups
It can be more difficult to get an unsecured business loan for startups at certain lenders over others. For example, banks typically require at least 2 years of business history, and may be unwilling to work with newer businesses.
On top of this, banks also view unsecured loans are inherently riskier, and tend to issue less of them.
Although it’s still possible to obtain unsecured financing from a bank as a startup, it can be challenging. If your bank application is rejected, you still have many other options.
Another solution is to work with online lenders. Online lenders are more flexible and much more willing to work with newer businesses like startups. They are more likely to offer unsecured business financing solutions while also being renowned for easier, faster application processes with funding times as quick as 24 hours.
The downside is that online lenders can be slightly prices than banks. Nevertheless, you can still compare multiple offers to select the best deal.
4. Compare business loans
If you’re looking for a more efficient, all-encompassing approach to lending that allows you to compare multiple offers – National has solutions. National Business Capital is an online business financing marketplace that helps all types of businesses, including startups, secure business loans and other funding solutions.
There’s no minimum credit score requirement and you can get funding with as little as 6 months of business history. This is ideal for startups, who are oftentimes turned away by banks for not having enough business history or credit history.
Plus, National works fast to get you the funds you need deposited in hours.
Start by filling out the 60-second application and an expert Business Financing Advisor will contact you to explain your personalized solutions. You’ll be matched with numerous offers from over 75 different lenders – allowing you to compare to find the best fit!
Learn more about the financing options you could qualify for here.
FAQ
What is a startup business loan?
A startup business loan is a type of business financing aimed at companies that are in the first stage of their operations, and are seeking funding in order to develop or scale their product or service. Startup loans typically come in the form of unsecured business loans, such as Small Business Administration loans (SBAs), merchant cash advances, crowdfunding, and more.
What is an unsecured business loan for startups?
An unsecured business loan for startups is a type of business loan that doesn’t require security. As opposed to a secured loan, in which the lender uses assets to recoup the cost of the loan in case the startup can’t pay it back, unsecured loans don’t involve any collateral, which often translates to higher risk for the lender.
How can I get an unsecured business loan for my startup?
To get an unsecured business loan for your startup, you can go to a traditional or an online lender. In most occasions, you will have to submit an application form, as well as any relevant documentation (such as financial and legal documents) so that the lender can evaluate your application. You can also use National Business Capital to easily compare dozens of lenders in just a few clicks.