For any startup or a small business in any industry, loan is a fundamental entity. It’s what sets them up for their financial security. But of course, since they may just be starting out, there’s a chance they don’t have any collateral for the loan. In that case, they can get an unsecured business loan.

So many small business loan applications now target unsecured options. But why? Well, they want to access their required funds without tying up valuable assets. Or maybe, the business doesn’t have an asset to keep in collateral. If you are one of these businesses, understanding the process is crucial.

Well, this blog will help you understand how to get an unsecured business loan, from assessing eligibility criteria to the process. First though, let me brief you about it.

What is an Unsecured Business Loan?

An unsecured business loan is a type of finance and funding option through which a business can borrow funds without keeping any asset as collateral. While in secured loans, lenders ask for an asset like property or equipment as a guarantee of borrower’s creditworthiness.

Key Highlights

  • No Collateral Required: The defining characteristic of an unsecured loan is that it doesn’t require the borrower to provide any assets as security.
  • Creditworthiness Matters: Lenders assess the borrower’s credit score, financial statements, and business performance to determine their eligibility and the loan terms.

Basically, unsecured business loans are given based on a business’s financial strength, rather than their assets.

Eligibility for Unsecured Business Loans

When it comes to getting unsecured business loans, lenders place a strong emphasis on the borrower’s financial health and creditworthiness. So it’s important to meet a certain eligibility criteria.

Credit Score

A strong personal and business credit score is paramount. Lenders use these scores to assess your credit history and the likelihood of repayment. Generally, a higher credit score increases your chances of approval and can lead to more favorable loan terms.

  • Personal: 680+ credit score on CIBIL
  • Business: 80+ on the FICO SBSS (Small Business Scoring Service℠)

Business History

Lenders often require businesses to have been operational for a minimum period, typically ranging 1-3 years. This demonstrates stability and a track record of financial performance.

Financial Statements

Providing accurate and up-to-date financial statements, including profit and loss statements, balance sheets, and cash flow statements, is crucial. These documents allow lenders to evaluate your business’s financial health and ability to repay the loan.

Annual Revenue

Lenders may have minimum annual revenue requirements to ensure that your business generates sufficient income to cover loan repayments. Often, lenders desire businesses to have strong revenue, often $100K+ annually.

Debt-to-Income (DTI) Ratio

Lenders assess your debt-to-income ratio to determine your ability to manage additional debt. A lower ratio indicates a stronger financial position. The DTI should be preferably under around 30-40%.

Business Bank Statements

Lenders will also review 3 to 6 months of business bank statements, to see the cash flow of the company.

You can consult with Nihal Fintech and get our unsecured business loans. We verify these eligibility factors and provide you with the best terms for funding and repayment.

How to Get an Unsecured Business Loan?

Securing an unsecured business loan is a little different from the typical funding process, and the reason is, no collateral. Here’s how you get an unsecured business loan:

Step 1: Assess Your Business Needs

Determine the exact amount of funding you require and how you plan to use it. This will help you choose the right loan product and avoid borrowing more than necessary.

Step 2: Check Your Credit Score

Review your personal and business credit reports to identify any errors or discrepancies. Address any issues promptly, as a strong credit score is crucial for unsecured loan approval.

Step 3: Prepare Financial Documents

Gather essential financial documents, including:

  • Business bank statements (typically for the last 3-6 months)
  • Profit and loss statements (for the last 1-3 years)
  • Balance sheets (for the last 1-3 years)
  • Tax returns (business and personal)
  • Business plan, if available.

Step 4: Research and Compare Lenders

Explore various lenders, including banks, credit unions, and online lenders, to compare loan terms, interest rates, and eligibility requirements. 

Step 5: Follow the Pre-qualification Process

If possible, go through a pre-qualification process. This will give you an idea of what loan amounts and terms you might qualify for, without hurting your credit score with a hard inquiry.

Step 6: Submit Your Application

Once you’ve chosen a lender, complete the loan application accurately and provide all required documentation.

Step 7: Underwriting and Approval

The lender will review your application and financial documents to assess your creditworthiness and determine your eligibility.

Step 8: Review and Accept Loan Terms

Carefully review the loan agreement, including the interest rate, repayment terms, and any fees. If you’re satisfied, accept the loan offer.

Step 9: Receive Funding

Once the loan is approved and you’ve accepted the terms, the funds will be deposited into your business bank account.

Step 10: Repayment

Make timely payments according to the agreed-upon repayment schedule to avoid penalties and maintain a positive credit history.

If you want unsecured business loans with favorable terms, get help from Nihal Fintech. But what kinda documents will be necessary?

Documents Required for Unsecured Business Loans

For anyone trying to apply for unsecured business loans, the lenders require a range of key documents. These include:

  • KYC Documents: A copy of your PAN card or Aadhar card.
  • Current Address Proof: This can be in the form of a utility bill, rent agreement, or passport.
  • Income Documents: Such as your latest salary slip or bank financial statements.
  • Financial Documents: Including bank statements for the last three months and ITR of the last 3 years in case of business loan.

Please understand that these documents are indicative. More may be required during the loan processing.

FAQs on Getting Unsecured Business Loans

What is the main difference between secured and unsecured business loans?

Secured loans require collateral, such as property or equipment, while unsecured loans do not. Unsecured loans rely on your creditworthiness and financial history.

What credit score do I need for an unsecured business loan?

Credit score requirements vary, but generally, lenders prefer a strong personal and business credit score. A score of 680 or higher is often preferred, but some lenders may work with lower scores.

What are the interest rates for unsecured business loans?

Interest rates are typically higher for unsecured loans compared to secured loans due to the increased risk for lenders. Rates can vary based on your credit score, financial history, and the loan term.

What happens if I default on an unsecured business loan?

Defaulting on an unsecured loan can severely damage your credit score and lead to legal action from the lender. It’s crucial to ensure you can comfortably repay the loan before borrowing.

Can I get an unsecured loan with bad credit?

While it’s more challenging, some lenders offer unsecured loans to businesses with bad credit. However, these loans often come with higher interest rates and stricter terms.

How much can I borrow with an unsecured business loan?

The loan amount depends on your creditworthiness, financial history, and the lender’s policies. Loan amounts can range from a few thousand dollars to hundreds of thousands of dollars.

Let’s Summarize

Unsecured business loans ensure funding without risking collateral. But approval depends on strong credit, steady revenue, and a solid financial track record. Prepare your documentation, understand lender criteria, and ensure your credit worthiness.

If you don’t qualify yet, consider alternatives like business credit cards or SBA loans, or take steps to improve your credit and cash flow before reapplying. With the right approach, an unsecured loan can be a smart, flexible financing solution for your business needs.

If you want to get unsecured business loans, contact Nihal Fintech and take the next step forward today!