Unsecured Startup Business Loan Options – Forbes Advisor

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Starting a business can seem like a bit of a no-win situation. Often, lenders won’t give you a business loan unless you can offer collateral, an asset they can take back in the event of a default. However, with high start-up costs, entrepreneurs usually need financing to get started.

This is when business loans that require no collateral come in handy. While it’s easier to get one as an established business, it’s not impossible. If you spend a little more time developing and executing a plan, you can probably get the financing you need.

What are unsecured business loans?

Convincing a lender to give you money for a business venture is difficult. Most of the time, they want to see a proven success story with solid, consistent income. You are a riskier candidate without it.

Lenders sometimes require collateral to reduce the risk of a loan transaction. This means that if you default, they can seize the collateral – whether it’s a bank account, business inventory, real estate, etc. – to recoup their losses.

But with an unsecured business loan, you can get financing that doesn’t require collateral. But keep in mind that since there are no commercial assets securing the loan, lenders generally have stricter qualification requirements and will impose a personal guarantee.

How do unsecured business loans work?

Unsecured business loans help businesses make large purchases and cover the cost of doing business. Funds are usually disbursed as a lump sum which can be used to make a specific purchase or manage cash flow and is then repaid with interest. However, there are other types of small business loans, such as lines of credit, merchant cash advances, and invoice financing, that can be used to access cash faster and when needed.

Personal guarantee requirement

If you are applying for an unsecured business loan, you will usually need to sign a personal guarantee for the loan. It’s not quite the same as pledging property for a secured loan, but if you default, the lender can come and collect your personal assets to cover what you owe.

Unsecured start-up business loan options

If you are starting a new business from scratch, you will probably need a large sum of money. Here are some of your unsecured business loan options:

SBA loans under $25,000

If you only need a small amount of start-up funds and aren’t in a rush, a US Small Business Administration (SBA) loan under $25,000 may be a viable option.

These types of loans generally offer the most business-friendly terms, with lower rates than other loan options. This is because part of it is guaranteed by the SBA, so if you default, the lender may be able to recoup some of their losses directly from the government.

SBA loans come in all shapes and sizes. For large loans, collateral is usually required. But if you’re applying for a standard SBA 7(a) business loan, you probably won’t have to post collateral for loan amounts under $25,000. However, you and any other owner with at least 20% equity in the business will have to personally guarantee the loan. This means that you legally agree to repay what you borrowed with personal assets if the business does not.

Online start-up loans

Traditional financial institutions may not be so nice to start-ups, but that doesn’t mean other lenders aren’t. It’s relatively easy to find loans specifically for new startups, often from smaller online lenders. Like other forms of alternative financing for small businesses, online start-up loans tend to be expensive, so you’ll need to factor this carefully into your business plan.

Cash Advances to Merchants

When you take out a merchant cash advance (MCA), you will be paid a lump sum upfront, just like with a loan.

However, rather than paying it back in regular installments over time with interest, you’ll agree to a factor rate that fixes the total amount you pay for the loan up front. You then pay it back as a percentage of your credit card transactions, this is called a percentage hold. These payments are usually made much more frequently, sometimes even daily, than with a conventional loan, and you will continue to make them until your advance amount is fully repaid.

For example, if you borrow $10,000 with a factor rate of 1.25, you will repay the lender a grand total of $12,500 ($10,000 x 1.25). If you agree to a 10% holdback percentage, you’ll pay your lender 10% of all your daily sales until you’ve repaid the full amount (the $10,000 you borrowed, plus the $2,500).

Because your payout amount varies based on your sales, this is an especially great option for businesses that experience seasonal fluctuations in revenue or new startups that can’t commit to a certain amount of monthly payment. However, since there is no set term, you cannot easily calculate an equivalent annual percentage rate (APR) and compare it with other loan options. Generally, however, they are more expensive than standard business loans.

Alternatives to Unsecured Business Loans

Many businesses need multiple sources of financial support to get started. You may need to cobble together several types of seed funding. Here are some other ideas:

Equipment financing

Equipment financing is similar to how auto financing works. When you take out a car loan, it’s secured by the car you’re buying, which means you don’t need to have collateral in hand before getting the loan. Similarly, many small business lenders offer secured loans in the form of equipment financing, with the equipment you buy serving as collateral for the loan.

While this type of loan may not necessarily meet your storefront, business inventory, or labor needs, it can be a good option if you need equipment to get started.

Crowdfunding

If you have a strong social network, another option to consider is crowdsourcing to raise the funds you need to start your business. This obviously won’t work for everyone; you wouldn’t expect to start a new biomedical business by fundraising on Kickstarter, for example. But if your business is relatively small, this could be a good choice.

Personal savings

Many people also use their own personal savings to start their business. It can be tempting to loot your emergency and/or retirement savings, as these are probably the biggest buckets available to you; however, think carefully before doing so. Make sure you have a plan in place for what to do if you lose that money.

It’s also a good idea to work with an experienced small business accountant who can advise you on the most tax-efficient business setup and how to amortize your personal investments in the business.

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