Many business owners do not have the collateral to apply for a secured business loan. Secured business financing requires you to use your assets for collateral. If you do not own land, property, or expensive machinery, you may feel defeated. An unsecured business loan is the best option for small thriving business owners.
What Do Financial Institutions Look for in an Application?
If your business is thriving and profiting, you can apply for an unsecured business loan. The financial institution will determine whether or not you qualify based on these three main factors:
- The longevity of your business
- Credit score
- Profit projections
Your credit score is a significant factor in determining whether or not the financial institution will fund your business. If you have a bad credit score, you should first improve your score. When the financial institution checks your credit score, they do a “hard check.” This means it will negatively affect your credit score.
How Will the Financial Institution Determine the Interest Rate?
The interest rate of your unsecured business loan is determined by the risk. If your company is relatively new or in its start-up phase, you cannot prove your business is established or the pattern of profits. The private institution will determine you are a higher risk. This will be reflected in the interest rate.
If you own a business and it is older, you can prove longevity and a pattern of sales, profits, and projections. When you apply for an unsecured business loan, the private institution will determine a lower interest rate because you are not a high risk.
If you have a low credit score, you will most likely be denied for an unsecured business loan. They may tell you that you are too risky. Even with a personal guarantee, they will suggest you first increase your credit score and apply again.
In general, unsecured business loans have a higher interest rate than secured business loans. Unsecured loans are riskier for the lender. If a borrower fails to pay back an unsecured business loan, the lender can easily seize collateral such as property, expensive business machinery, and other assets. With lower risk comes lower interest rates.
What Is a Personal Guarantee?
Although unsecured business finance does not require collateral, they may require a personal guarantee. A personal guarantee is a promise you will make to accept full responsibility of the business debt incurred if the business cannot repay the loan. This means you are personally liable for the loan if the business fails.