Best Unsecured Business Loans of 2020

0
3

[ad_1]

If you’re a small-business owner, you may have looked into a small-business loan as a source of financing. Small-business loans typically are used to start or expand a business, purchase inventory and supplies, or strengthen a business’s solvency. In fact, 40% of small businesses applied for funding in 2017, according to the most recent Federal Reserve Small Business Credit Survey.

However, many lenders require small-business owners to offer some form of collateral for a business loan. Collateral can be business or personal and include real estate, equipment, savings, an auto title or other assets.

The median small business has less than a month’s worth of cash available to pay expenses if there were to be a gap in the company’s cash flow, according to a 2016 JP Morgan Chase & Co. Institute study. Many small businesses don’t have collateral to pledge for a loan, or owners would have to put personal assets on the line, such as a home.

Unsecured loans from alternative lenders may be a good choice for small businesses that don’t have collateral or well-established credit ratings.

“An unsecured loan can provide essential financing for a business that is facing a crisis or an opportunity,” says Gerri Detweiler, education director for Nav, which offers free personal and business credit scores and a small-business financing marketplace.

Small-business loans can be difficult to obtain without collateral, but options do exist. This guide will help you explore those options and find the best loan to start or grow your small business.

You’ll learn about the different types of unsecured financing for small businesses, how to apply for an unsecured small business loan, and how to choose the best unsecured business loan for your company’s needs.

What Are the Best Unsecured Business Loans of 2020?

  • BlueVine: Best lender for borrowers with FICO credit scores as low as 530.

  • Funding Circle: Best lender for borrowers with FICO credit scores as low as 620.

  • Kabbage: Best Lender for Alternative Qualification Requirements

  • OnDeck: Best lender for borrowers with FICO credit scores as low as 600.

  • Rapid Finance: Best lender for up to $1 million loan amount.

  • StreetShares: Best lender for borrowers with six months or more in business.

  • TD Bank: Best lender for online loans and lines of credit under $100,000.

U.S. News conducted an in-depth review of the top small business loan companies to recommend the best alternative lenders offering unsecured business loans. Recommendations are based on key factors, including customer service ratings, collateral requirements and loan options.

These lenders are a good starting point for most businesses. But there is no one-size-fits-all loan that is perfect for every business, so carefully research each option yourself.

Best lender for borrowers with FICO credit scores as low as 530.

BlueVine offers a variety of business loans, including business lines of credit, term loans and invoice financing. Businesses that have been operational for at least six months may qualify.

Highlights

  • Loan types: Term loans, lines of credit, invoice financing
  • Minimum years in business: 6 months
  • Minimum annual revenue: $100,000
  • Minimum FICO credit score: 530 for invoice factoring, 600 for line of credit or term loan
  • Loan amounts: $5,000 to $5,000,000
  • Loan terms: 6 months to 1 year for lines of credit, 26 weeks to 52 weeks for term loans
  • Origination fee: N/A
  • BBB rating: A+

Best Features

  • Invoice factoring credit lines can be as large as $5 million.

  • Disbursement usually occurs within 24 hours.

See full profile

Best lender for borrowers with FICO credit scores as low as 620.

Funding Circle is a small business lending platform. Globally, investors on the platform have lent more than $8.6 billion since 2010. There is no minimum annual revenue requirement.

Highlights

  • Loan types: Fixed-rate term loans
  • Minimum years in business: Two
  • Minimum annual revenue: None
  • Minimum FICO credit score: 620
  • Loan amounts: $25,000 to $500,000
  • Loan terms: 6 months to 5 years
  • Origination fee: Our fee structure is simple: we charge a one-time origination fee on each loan we fund ranging from 3.49% to 6.99%. Just like your interest rate, your origination fee will be determined during our underwriting process and is based on your creditworthiness and term chosen.
  • BBB rating: A+

Best Features

  • Term loans of up to $500,000 are available.

  • Funding Circle does not have a minimum annual revenue requirement.

See full profile

Best Lender for Alternative Qualification Requirements

Kabbage launched its lending platform in 2011 and has helped more than 170,000 small businesses access more than $6.5 billion in financing. Loans as small as $500 are available.

Highlights

  • Loan types: Lines of credit
  • Minimum years in business: One
  • Minimum annual revenue: $50,000
  • Minimum FICO credit score: Kabbage looks at your business performance — not just a credit score — to let you know right away how much funding you can access.
  • Loan amounts: $2,000 to $250,000
  • Loan terms: 6 months to 18 months
  • Origination fee: None
  • BBB rating: A+

Best Features

  • alternative qualification requirements

See full profile

Best lender for borrowers with FICO credit scores as low as 600.

OnDeck has served 100,000 borrowers since 2007. The lender offers term loans and lines of credit with fixed interest rates. Term loans of up to $500,000 are available.

Highlights

  • Loan types: Fixed-rate term loans, lines of credit
  • Minimum years in business: One
  • Minimum annual revenue: $100,000
  • Minimum FICO credit score: 600
  • Loan amounts: $5,000 to $500,000
  • Loan terms: N/A
  • Origination fee: N/A
  • BBB rating: A+

Best Features

  • Both term loans and lines of credit are available.

  • Borrowers with FICO credit scores of 600 or higher may be approved.

  • Loans from $5,000 to $500,000 are available.

See full profile

Best lender for up to $1 million loan amount.

Rapid Finance has an extensive selection of loan types, including term loans, lines of credit, invoice factoring, merchant cash advances and asset-based loans. Businesses must be established for at least three to six months to qualify.

Highlights

  • Loan types: Term loan, lines of credit, bridge loan, healthcare cash advance
  • Minimum years in business: Three to six months
  • Minimum annual revenue: Not disclosed
  • Minimum FICO credit score: Not disclosed
  • Loan amounts: $5,000 to $1,000,000
  • Loan terms: 3 months to 60 months
  • Origination fee: Not disclosed
  • BBB rating: A+

Best Features

  • Rapid Finance can fund business loans as fast as one day.

  • Multiple loan options are available, with funds of up to $1,000,000.

  • Borrowers with all types of credit may be approved.

See full profile

Best lender for borrowers with six months or more in business.

StreetShares lends term loans, lines of credit and invoice financing to businesses. Loans as small as $2,000 are available.

Highlights

  • Loan types: Term loan or line of credit
  • Minimum years in business: At least one year but sometimes 6 months
  • Minimum annual revenue: N/A
  • Minimum FICO credit score: N/A
  • Loan amounts: $2,000 to $250,000; $200 for new customers
  • Loan terms: 3 months to 36 months
  • Origination fee: 3.95% or 4.95%
  • BBB rating: A+

Best Features

  • Loan amounts range from $2,000 to $250,000.

  • There are no upfront or prepayment fees.

  • The minimum FICO score required is 600.

See full profile

Best lender for online loans and lines of credit under $100,000.

Overview:
TD Bank has about 1,300 branches nationwide. In addition to SBA-backed loans, small business owners can apply for a business line of credit, commercial mortgage loans, equipment loans and loans for expansion and renovation with TD Bank.

SBA Loans Offered:

Best Features

  • TD Bank has several loan options from which to choose.

  • Term loans of up to $1 million are available.

See full profile

How Do Unsecured Business Loans Work?

Small-business lenders typically require some form of collateral before approving a loan. Collateral is a valuable asset the borrower offers as security for the repayment of the loan. If the borrower defaults on the payments, the lender can claim the collateral.

If your business has valuable assets, such as inventory, furniture, real estate, vehicles, even computer code, you might be able to use them as collateral for the loan. But if you don’t have any business assets, lenders may approve a loan with the expectation that you offer personal assets as collateral, such as your family home or a vehicle.

Not every borrower is in a position to put up collateral for a small-business loan. The good news is that there many alternative lenders that not only make small-business loans to those who would usually be denied by traditional banks but also offer unsecured loans that require no collateral.

Advantages of Unsecured Business Loans

Easy to obtain: Unsecured business loans are easier to obtain than secured business loans because your business doesn’t need to supply collateral. They typically offer a faster, simpler process for the small-business owner and financial institution to work through the application and funding process.

“It’s similar to the difference between applying for a credit card, which is unsecured and usually provides immediate access to credit, and a vehicle loan or a mortgage, where a financial institution takes a lien on the vehicle or the house as collateral,” says Mark Mitchell, head of small business distribution strategy at TD Bank.

Faster approval turnaround: Unsecured business loans usually have faster approval times. Online applications aren’t nearly as lengthy as a typical loan application. Some lenders approve unsecured business loan applications in as little as 24 hours. Other forms of financing, such as a secured business loan or SBA-guaranteed loan, can take a month or longer to be approved.

Higher loan amounts: Small businesses may be approved for a higher loan amount with an unsecured loan than a secured one. Because there are no collateral requirements limiting the value of the loan, the amounts can potentially be higher, points out Bill Burnham, a Florida Small Business Development Center consultant at the University of South Florida.

Typically with secured loans, you can’t borrow more than the value of your collateral. In fact, lenders normally extend up to a certain percentage of how much your collateral is worth. This value of your loan against the value of the personal or business property you are providing as collateral is called the loan-to-value ratio.

Fewer restrictions on use of funds: Unsecured business loans typically don’t have many restrictions, aside from not using the financing for illegal activities, gambling or buying securities.

Lenders can’t take your business property: While a lender can seize collateral if your business defaults on a secured loan, a lender can’t take your business or personal property if you default on an unsecured business loan without a court order.

Unsecured loans may be discharged in bankruptcy: If your business files for bankruptcy, the court may discharge unsecured loans. Secured loans are typically not discharged.

Disadvantages of Unsecured Business Loans

Personal guarantees are required: With an unsecured business loan, the borrower typically signs a personal guarantee. While you don’t need to provide a specific asset when you sign up for the loan, even if you sell or dissolve your business, you are still personally liable for the loan and need to pay back the loan if you have a personal guarantee. A lender has a greater ability to pursue any assets you personally own – now or in the future.

Higher interest rates: Unsecured business loans are riskier for lenders, so interest rates on unsecured business loans are often higher than on secured business loans, Burnham says. Your business will likely pay more over the life of an unsecured loan than a secured loan of the same amount.

Shorter repayment terms: Unsecured business loan repayment terms are usually shorter than those of secured business loans, which means the borrower will need to be prepared to pay off the loan quickly. Plus, the lender may require more frequent payments. “Some lenders require payments on a weekly basis, which may cause a cash crunch for the unprepared business owner,” Burnham says.

Qualification requirements: Unsecured business loans can be harder to qualify for. If your business has a poor or nonexistent credit history, the lender may not approve your application. You may be required to provide both personal and business credit histories.

Conversely, some lenders don’t weigh your credit as heavily and look primarily at your business’s revenue, Detweiler explains. For example, a business with strong credit card sales, or sales via Paypal or Amazon, may be able to get an advance on those funds, and the decision will largely be based on that revenue.

While there are drawbacks to unsecured business loans, particularly that they can be more expensive than traditional business loans, unsecured business loans aren’t necessarily a bad thing, Detweiler says. “If you need money fast to take advantage of a great opportunity, then it can make sense,” she says. “Or if you have a crisis that can be overcome – not made worse – by a short-term loan, it makes sense.”

What Are the Types of Unsecured Small Business Financing?

Unsecured small-business loans work just like traditional small-business loans, except that you aren’t required to offer a form of collateral. Alternative lenders are usually a better option than turning to credit card debt, and they can offer more favorable rates and less red tape than a commercial lender, explains Phillip Russo, a business consultant with the Louisiana Small Business Development Center at the University of Louisiana at Lafayette.

“The application process is usually easy, fast and does not impact your credit score,” Russo says. “Typically, the loans are unsecured and can accommodate small startup expenditures and working capital.”

Types of unsecured small-business loans typically offered by alternative lenders include:

Term loans: Term loans provide small businesses with a lump sum of capital. Businesses agree to pay back the term loan over a set amount of time with an agreed-upon payment schedule. Each payment includes the principal amount, plus the interest you owe on the loan for that period. While these loans are typically easy to secure, term loans with short repayment periods can be challenging for a small business or a startup because of larger payments.

Business lines of credit: With a business line of credit, a lender approves you for a revolving line of credit. It works similar to credit cards; there’s a maximum limit you can borrow, and you’ll be charged interest only for the amount of money you borrow.

You can rely on your line of credit for business-related expenses, such as purchasing inventory, investing in marketing, filling in cash flow gaps or growing your business. Let’s say you have a $10,000 business line of credit, and you spend $5,000. You’ll still have $5,000 available, and once you pay $5,000 back to your lender, you’ll be back to the original amount.

Business lines of credit can be secured or unsecured. This form of financing can provide flexibility for paying business expenses, but unsecured lines of credit can be challenging to secure from a bank, Russo explains. “Banks typically want collateral to secure the amount requested, and they are easy for business owners to deplete if business is not sustainable,” he says. In turn, this will be more challenging if the business fails in paying back the line of credit.

Riskier Unsecured Financing Options

Invoice financing: Also known as invoice factoring, invoicing financing is an option for small businesses struggling with cash flow issues, specifically due to unpaid invoices. With invoice financing, you sell your unpaid invoices to a lender at a discount. You’ll typically get about 80% of what the invoices are worth, and the lender will seek payment for the full value from customers.

Invoice financing can be risky and expensive. While invoice financing is easy to secure, Russo points out that the lender will take a portion of the amount, which could be hefty. Plus, the fees can quickly add up. There’s typically a factoring fee based on a percentage of the invoice, plus a cash advance interest charge. Small-business owners should carefully consider the costs when it comes to invoice financing.

Merchant cash advances: A merchant cash advance, or MCA, is a financing option for those who are seeking quick access to capital. The lender provides a single sum of cash for a percentage of your forecasted sales.

You will repay the advance, plus any fees, with either a portion of your future credit and debit card sales, or fixed daily or weekly transfers from your bank account. Your fees are determined after assessing your risk. Borrowers perceived to be a lower risk will net more favorable borrowing terms and lower fees.

Borrowers should beware of the long-term financial implications of MCAs. Because they normally have interest rates that can hit triple digits, they are often not a sound choice.

How Can You Choose the Best Unsecured Business Loan?

When choosing an unsecured loan for your small business, pay attention to the lender’s eligibility requirements, loan options, costs and reputation. Keeping these factors top of mind will help you increase your odds of finding an alternative lender that will approve your loan and offer you solid customer service, support and the best terms possible with reasonable fees.

It’s important to find a lender that is a good fit with your eligibility. Otherwise, you may waste time and money applying with lenders you don’t qualify to receive financing from.

  • Minimum personal and business credit score: Lenders may review one or the other, or both, and sometimes it’s hard to know which will be most important, Detweiler explains. To be safe, get a credit report for both your personal and business credit score, and scan it for errors. Depending on the errors, they could hurt your credit score. You’ll want to dispute these errors before you apply for financing, and take steps to improve your credit score.
  • Minimum years in business: Most unsecured business lenders don’t work with startups. They typically require a minimum of three months to two years in business, usually at least one year.
  • Minimum annual revenue: Some lenders extend financing to startups with no minimum revenue. If that’s the case, other factors may be weighed more heavily, such as creditworthiness and projected revenue.

Loan types: Narrow your search to lenders that offer the type of loan you’re seeking, whether that’s a term loan, a business line of credit or an equipment loan. Create a detailed, thorough business plan, focus on the type of funding and amount you need, and be prepared to answer lender questions, Burnham points out.

“As with any loan, accuracy in supplying the requested information will assure a quicker turnaround through the application process,” he says. “An applicant should be mindful of information needed for a personal financial statement and history of payment and open accounts.”

Loan limits: Find a lender who will offer loans in the amount you need. Settling for a lower amount could burden you with loan and interest payments you may have trouble keeping up with, without sufficiently addressing your capital needs.

Term length: As unsecured business loans typically have shorter repayment periods than secured ones, that means higher monthly payments. In addition to the length of the repayment period, you’ll want to see how frequent the payments are.

As a business owner, you want profits earned from your business to go back into your company, not paid to a lender. Therefore, the loans that cost you less in the long run are typically the best for your business’s financial foundation. You’ll want to carefully review all the costs involved when shopping for a loan that will cost you the least. Be sure to consider the following:

  • APR
  • Down payment
  • Origination fee
  • Additional fees

You’ll want to be able to trust the lender. Spend some time reading online reviews to learn the experiences of fellow small businesses. Read reviews from the aggregate review site Trustpilot as well as the Better Business Bureau.

Watch out for online scammers. They often make credible-looking sites designed to trick you into sending them money for a loan that never materializes. “They can feel like a breath of fresh air because they will approve your application when others won’t,” Detweiler says. “But then they require you to send them money upfront to cover ‘the first three monthly payments’ or ‘insurance.’”

Signs that the supposed online lender is a scammer include not looking at your credit history during the application process. If an online lender doesn’t care about your creditworthiness, it isn’t interested in loaning you money. Online lenders are also legally required to register in the states they do business. If this isn’t easy to find on the company’s site, check with your state attorney general’s office. You can also check if there are any complaints filed with the Consumer Financial Protection Bureau.

How Can You Prevent Costly Mistakes With Unsecured Business Loans?

If you need money in a pinch and a Small Business Administration loan or financing from a traditional lender isn’t an option, you want to proceed with caution when obtaining an unsecured business loan. It’s easy to overextend yourself, especially if you need the financing sooner than later. To prevent making costly mistakes, here are some tips when taking out unsecured business loans:

Write a detailed business plan.

Writing a detailed, thorough business plan is essential to getting any type of business loan. The lender will look carefully at the strengths and weaknesses of your business, including your credit trade lines with other businesses, bank account statements, profit margins and revenue projections, Mitchell explains. You’ll also need to include your personal and background information as well as that of your business partners and other major team members.

If you’re having trouble obtaining an unsecured business loan, reach out to the lenders that denied your application to pinpoint why your application was denied, and work on improving in those areas. Consider adjusting your business plan. Perhaps you don’t need as much funding as you initially thought.

Make sure your personal finances are in order.

Additionally, small-business owners must ensure that their personal finances are in order, as this can often come into play when being considered for an unsecured business loan, Mitchell says. Make sure your personal credit score is as high as it can be and your bills are paid on time.

Check your personal and business credit scores before you apply for an unsecured business loan, Detweiler advises. If your scores aren’t as strong as they could be, look at the factors affecting them to see if you can address any of them quickly. For example, personal scores are often influenced by high debt usage ratios on credit cards. Paying down high balances often results in an increase in your personal credit score.

Be prepared to answer questions quickly.

When it comes to unsecured business loans, small-business owners should be prepared to answer questions related to the fundamentals of their business quickly and accurately, Mitchell says.

“Given the assumption of risk by lenders issuing an unsecured loan and the quick approval process, it is even more critical to address any follow-up questions in a timely manner, and as consistently and thoroughly as possible,” Mitchell says. Besides your business plan, have documents such as a valid form of ID, copies of business licenses, tax returns, bank statements, and proof of ownership on hand.

Carefully plan how you’ll be using the funds. If you don’t have a detailed plan for the money you hope to borrow, you run into the danger of taking out more than you need and may have trouble paying it back.

The duration and type of loan should match the purpose of the loan, Mitchell recommends. For instance, an unsecured line of credit can be an appropriate option for small-business owners who need capital to cover short-term expenses such as payroll while waiting for customers to pay them.

“Banks typically charge interest only for the line of credit every month, and it is up to the customer to determine how much of the outstanding balance they pay every cycle,” Mitchell says. “This way, the line of credit is paid back as the borrower gets paid by their customers.”

In contrast, if a small-business owner is looking to purchase a piece of equipment he or she might operate for the next three to five years, a term loan is a more appropriate type of financing, Mitchell explains. That way, when the equipment or vehicle is done being useful, the loan will have been paid off.

Before getting an unsecured business loan, weigh the costs against the benefits to make sure it’s a sound choice. While unsecured business loans don’t require collateral and have a quick approval process, an unsecured business loan also is typically costlier for the borrower, with higher interest rates and personal guarantees.

Consult with bankers, peers and accountants to get more information about whether an unsecured business loan is a good fit, Mitchell advises.

Prepare to handle short repayment periods.

Because unsecured business loans typically have shorter repayment periods than other forms of financing, do the math and make sure you’ll be able to manage the payments. Carefully assess the profitability and cash flow of your small business.

You’ll also want to check and see if there are any prepayment penalties. Some lenders may charge a prepayment penalty, others may charge a prepayment discount that reduces the total amount of interest you’ll pay, and others charge a fixed amount for the financing, regardless of how quickly you pay it off, Detweiler says. If you pay off your loan faster than you planned, any of those options will cost more than if you were only charged for the days the balance was outstanding.

If you find that an unsecured business loan may not be the best fit for your needs, consider alternatives. For instance, if you have collateral you could offer but were reluctant to make it available, it may make more sense to get a secured line of financing. You can also think of creative ways to tap into financing, such as crowdfunding, asking friends and family for a loan, or using a co-op business structure, where those who invest in your business also have say in how it will run and may take a cut of the profits.

“Not all of unsecured loans are created equal,” Burnham says. “The most important thing you can do is research. Analyze what the loan will do for your company financially, not just now but throughout the entire term of the loan.”

Advertising Disclosure: Some of the loan offers on this site are from companies
who are advertising clients of U.S. News. Advertising considerations may impact
where offers appear on the site but do not affect any editorial decisions,
such as which loan products we write about and how we evaluate them. This site
does not include all loan companies or all loan offers available in the marketplace.

[ad_2]

Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here