How To Get A Business Loan Without Security
Although small businesses now have a range of lenders who are willing to lend to them instead of just traditional banks, the problem is that even today, most lenders only consider creditworthy businesses or those who can put up security against the loan.
Arranging security against a loan can be a challenge for small businesses that have limited assets, to begin with, if they fail to repay the loan, they risk losing the only valuable assets they own, resulting in business operations coming to a halt.
Thankfully, several lenders are willing to provide unsecured financing without the need for security. You just have to make your business seem like a safe investment option for them. Here is how you can obtain an unsecured loan for your business:
1. IMPROVE YOUR CREDIT RATING
Although you can get an unsecured loan even with an average credit score, you will have to pay higher interest as a result. The better your credit rating, the higher your chances of securing an unsecured loan at a reasonable interest rate.
How can you advance your credit rating? The fastest method to do it is by reducing your credit utilization, which is the proportion of your available credit limit used. It makes up 30% of your total credit score. If you are using more than 25% of your current limit, you are damaging your credit score. Pay off your debts, close down any credit facilities you don’t need, and make sure your credit report is free from errors.
2. WORK ON YOUR CASH FLOW
If you want a business loan with no money down or security, you need to ensure that you have sufficient cash flow to be able to keep up with the interest payments and also repay the loan. Before you apply, come up with cash flow projections to see whether you have the funds needed to keep up with the loan payments. You are only putting your business’s survival on the line if you choose to obtain a loan you can’t afford to pay off. The lender will also want to see future cash flow projections to ensure that their money is likely to be repaid.
3. HAVE A CONVINCING BUSINESS PLAN
To convince lenders that your business is not a risky investment, you need to put up a business plan that demonstrates this. Create a business plan that includes the vision and objectives of your business, its sources of revenue, and detailed financial statements. You also need to state the purpose for which the loan will use. Most lenders need to see promising revenue generation for at least a year before they approve a loan.
4. CHOOSE THE RIGHT LOAN FOR YOUR NEEDS
Here are some of the most common unsecured business loans:
I. SBA LOANS
These are loans backed by the Small Business Administration to support small to medium-sized businesses. Most SBA loans do not require collateral and even have reasonable interest rates. However, the process is longer than other loans, and you must meet specific eligibility criteria to qualify.
II. TERM LOANS
Many online lenders offer both short and long-term unsecured loans to businesses for a variety of purposes. Application and approval on these loans are often relatively quick and straightforward, although the interest rates may be higher, particularly on short-term loans.
III. BUSINESS CREDIT CARDS
This funding option is known to all businesses, and it is a suitable way to finance the business in the short term. Many business credit cards come with an interest-free introductory period, which can be as long as 15 months, making it a desirable financing option. However, a defined repayment strategy needs to be in place to avoid running into financial trouble due to the misuse of business credit cards.
IV. INVOICE FACTORING
Under this arrangement, you get funding against your outstanding receivables and repay it once your customers pay off their balances. It is a great way to fill a cash flow shortage in the short run.
V. TRADE FINANCE
If you need financing to pay your suppliers, a trade financing loan can be an ideal option. The lender pays your supplier, allowing you to repay the loan within an agreed period, which is usually 120 days.
Trade financing is an excellent way for small businesses to fulfill any large orders quickly, as the suppliers can pay and the necessary inventory procured without any hassle.
THE BOTTOM LINE
To sum up, if you need to obtain a business loan without security, you can easily find several loan options in the market. If you have a decent credit score, sufficient cash flow, and a promising business plan, you should be able to find an unsecured loan that suits your business needs.
Just make sure to consider the terms of an unsecured loan to determine whether it is the best option for the business. Some of these loans come at a higher interest rate than secured loans or require other forms of personal guarantees, which is why you need to be sure that an unsecured loan is what you are after before you opt for it.