Although banks have become more active in small business lending in the years following the 2008 financial crisis, only the most creditworthy businesses are considered for financing, with most banks requiring some form of collateral to secure the loan. Such lending requirements create challenges for smaller businesses with few assets, or for business owners who don’t want to risk their personal assets. However, a number of non-bank lending sources have emerged, providing small businesses with more access to financing than ever before, without the need for collateral.
Most any business, regardless of stage or size, has access to unsecured financing through a number of alternative lending sources. Although they typically do not require any collateral, they do charge higher interest rates than traditional banks. In most cases, you can qualify for financing based on your credit history and a record of generating a certain amount of revenue. Although obtaining an unsecured loan through a non-bank lender may be easier than the preparation needed for a traditional bank loan, there are still some essential steps required to obtain the best possible terms.
Double-Check Cash Flow Projections
Unless you have a high credit score and a strong record of revenue generation, you are likely to be saddled with a high interest rate on an unsecured loan. The annual percentage rate (APR) can range from 10% for the most creditworthy borrowers to triple digits depending on the lender and the type of loan. Before searching for a loan, assess your cash flow projections to ensure you have sufficient funds to repay it. Failing to repay the loan will damage your credit score, making it more difficult to obtain any type of financing in the future.
Clean up Your Credit
Clean up your credit report and raise your credit score. Although it is possible to obtain an unsecured loan with bad credit, you will pay higher interest costs. The quickest way to raise your credit score is to lower your credit utilization ratio, which accounts for 35% of the score. The ratio reflects the amount of debt you are carrying in relation to the amount of your available credit. If your total debt exceeds 25% of your available credit, it is hurting your score. Pay down as much debt as you can to improve the ratio. Also, check for any reporting errors that can be removed and don’t open any new accounts.
Create a Solid Business Plan
If you haven’t already, develop a business plan that includes your business purpose, how it makes money, a growth strategy, detailed financial statements, cash flow projections and the purpose of the loan. Many types of non-bank lenders won’t ask you for a business plan. However, you will have to demonstrate a strong record of revenue generation for at least a year. If you go to a peer-to-peer or marketplace lender, you will need to show potential lenders why you would be a good risk.
Most non-bank lenders conduct their business strictly online. Although they all advertise speedy loan approval and funding, such companies vary in several ways.
Types of financing: Some lenders offer fixed loans while others offer variable loan rates. You can also find lenders that offer lines of credit. Avoid merchant cash advance financing, which is the most costly.
Qualification: Most non-bank lenders consider your credit score and business revenue, but they have varying levels of qualification. For instance, one lender may require $100,000 of annual revenue for a full year, while another may only require $50,000 for half a year. They may also have different minimum credit score requirements.
Prepayment fees: If your cash flow allows you to pay off the loan early, you don’t want to pay a prepayment fee.
Credit reporting: Some lenders report your payments to the credit bureaus while others do not. If you want to build your credit history, ask if the lender reports payments.
Obtaining an unsecured loan from an online, non-bank lender may not be nearly as difficult as with a traditional bank, but the costs can be significantly higher. To keep costs down, prepare as if you are qualifying for a bank loan. The better prepared you are, the better the terms you are likely to get.