Unsecured Business Loans

An unsecured business loan or line of credit is issued and supported by the owner’s creditworthiness, rather than by any form of collateral. For this type of funding, a small business owner must have good personal credit to be approved.

Definition of unsecured loans

Unsecured loans can be  categorized in three groups, no-collateral installment loans, such as unsecured business loans, unsecured business revolving lines of credit, and unsecured business credit cards. When you submit an application, the lender will check your creditworthiness and consider factors such as your income, assets and debt to see if you qualify.

Although unsecured loans and lines of credit are only guaranteed by your promise to pay, the lender still has recourse if you fail to make payments. The lender can send your account to a collection agency, take you to court to garnish your income and report your late payments to the credit bureaus. These actions will cause your credit scores to drop.

Who should get an unsecured loan?

Whether an unsecured loan is the right option depends on the business’s financial strength and the use for the funds. Businesses who need money but do not have collateral to secure a loan can consider an unsecured loan when:

  • Planning for a large purchase. Taking on debt can put a strain on your finances, but if you need funds for a big upcoming expense, an unsecured loan can help.
  • Businesses that have a high credit rating. A good credit score will yield a lower interest rate and better terms.
  • Having large amounts of sales and large amounts of cash flow is a positive criteria to repay the loan and lowers risk for the lender. Unpaid secured loans can negatively affect your credit.
  • Restructuring debt. Unsecured loans are useful as debt consolidation tools that can make debt repayment easier. This strategy can also help businesses retain money if they qualify for lower interest rates.

Contact us today for a free evaluation of your financing needs from one of our finance specialists.

Qualifications for an unsecured loan

To limit their risk, lenders want to be reasonably sure you can repay the loan. Lenders measure that risk by checking a few factors, so they may ask about the following information when you apply for an unsecured loan:

Business and Personal Credit Score

Lenders check credit reports to see how businesses managed all of their debt. Generally, they look for a history of responsible credit use (typically one or more years), on time payments, low debit balances. They’ll also check your personal credit score, which are calculated based on the information in your credit reports. Businesses with credit scores around 700 or higher usually qualify for the best interest rates.

Business Income

Knowing you have the means to meet your financial obligations, including the loan payments, lowers the lender’s risk. The lender may ask to see proof of stable, sufficient income, such as future sales forecast.

Your debt-to-income ratio

To calculate your debt to income ratio, add all your monthly debt payments and divide that total by your gross monthly income. For example, if you have $1000 worth of existing debt payments and $4,000 in gross income each month, then your DTI is $1000 / $4,000 = 0.25 or 25 percent.

Lenders use this number to measure your ability to repay a loan. The lower the ratio, the better. Every lender will have a different requirement for your DTI, but the maximum is usually no higher than 43 percent.

Assets

Although unsecured loans don’t require collateral, the lender may want to know that you have unencumbered assets. They know you’re less likely to miss loan payments when you’re prepared to cover financial emergencies.