Abasiakan DennyApplying for small business loans can be challenging for business owners. Startups usually have difficulty securing loans because they lack collateral. However, there are small business loans entrepreneurs can apply for. The terms and conditions for each loan type vary. Loans without collateral, also called unsecured loans, do not require collateral. The borrower does not need to pledge any asset as collateral before securing this loan. Nonetheless, the interest rate is higher when compared with traditional loans.
Types of Unsecured Loans
Unsecured loans provide leverage for entrepreneurs without collateral to secure traditional loans.. With no-collateral loans, businessmen can secure funds to grow their business. The different types of unsecured loans are:
SBA Loans
The Small Business Administration (SBA) loans have competitive interest rates and longer repayment terms. The 7(a) loan program is an example of a loan given by the SBA. Business owners can get loans up to $5000 or less without collateral. However, the SBA loans require a personal guarantee with more than 20% equity.
Online Loans
Online lenders provide various choices for securing no-collateral loans. Online loans are easier and quicker to access. However, they come with higher interest terms. Entrepreneurs who do not have collaterals can make use of these online loans. However, personal guarantee and specific agreements must be put in place.
Business Lines of Credit
The business line of credit is flexible and provides the business a predetermined access to funds. Entrepreneurs can borrow, repay and borrow again. Moreover, secured loans that give a fixed amount over a repayment timeline, a business line of credit grants continuous access to funds. Once the former loan is repaid, you can borrow more without applying.
Peer to Peer Lending
Peer-to-peer platforms connect borrowers with potential lenders to fund their loans. These loans do not require collateral but may have a higher interest rate than secured loans.
Steps to Apply for Small Business Loans without Collateral
The following steps must be taken in applying for small business loans without collateral:
Assess your Financial Situation
- Assess the quality of your business financial health when considering loan options. Check your credit scores. Credit scores are a numerical representation of your creditworthiness. It shows your borrowing and repayment history. Your credit score determines your ability to repay a loan. Lenders usually require a credit score of at least 600.
- Create a credible business plan to keep track of the amount of funding you need for your business. A clear business plan is important to convince lenders of your ability to repay the loan.
- Gather essential financial documents such as bank statements, balance sheets, and profit and loss documents. These are important for vetting your repayment abilities.
Research the Lenders
When applying for loans, ensure that you find the right lender. Research lenders and choose the terms that align with your business plan and goals. Traditional lenders require collateral, usually with low interest rates. However, online loan lenders provide quicker loans, accompanied by higher interest rates. Research the eligibility to secure loans by lenders, the interest, and the repayment terms.
Prepare Your Application
Once you have found a lender that you want, apply for the loan. Research and understand the eligibility criteria before applying for a loan. Fill out the forms and ensure that all fields are completed. Also, include all the important documents such as bank statements, business plan, etc.
Understand Loan Terms
Take time to read and understand the loan terms. Many unsecured loans require you to guarantee repayment. The repayment option is always fixed, which you must repay the loan irrespective of the health of your business. Compare the interest rate and any additional fees the loan may incur. Understand the repayment terms. The repayment terms should be flexible. Assess your financial strength and how long it will take to meet the deadline for paying back the loan.
Small business owners find it difficult to secure traditional loans because of the lack of collateral. However, there are unsecured loans entrepreneurs can assess to fund their businesses. Unlike usual loans, unsecured loans are quicker to secure but with higher interest rates. Personal guarantee and documentation are important requirements by lenders before giving out loans.
