Although banks have become more active in small businesses in the years following the 2008 financial crisis, only the most creditworthy businesses are considered for financing, with most banks requiring some form of collateral to secure the loan. .. Such lending requirements create challenges for smaller businesses with few assets or for entrepreneurs who do not want to risk their personal assets. However, a number of non-bank lending sources have emerged that offer small businesses more access to financing than ever before, without requiring collateral.
Most businesses, regardless of stage or size, have access to unsecured financing through a number of alternative lending sources. Although they usually do not require collateral, they charge higher interest rates than traditional banks. In most cases, you may qualify for financing based on your credit history and a record of generating a certain amount of revenue. Although obtaining an unsecured loan through a non-bank lender may be easier than preparing for a traditional bank loan, there are still some essential steps you need to take to get the best terms possible.
Cash flow forecasts with double check
Unless you have a high credit score and strong revenue generation, you will likely be charged a high interest rate on an unsecured loan. APRs can range from 10% for the most creditworthy borrowers to triple digits, depending on the lender and type of loan. Before looking for a loan, evaluate your cash flow projections to ensure you have sufficient funds to repay it. If you don't repay the loan, your credit score will be damaged, making it harder to get any type of financing in the future.
Clean up your credit
Clean up your credit report and increase your credit score. Although it is possible to get an unsecured loan with bad credit, you will pay higher interest costs. The fastest way to increase your credit score is to lower your credit utilization ratio, which is 35% of the score. The ratio reflects the amount of debt you carry relative to the amount of credit you have available. If your total debt exceeds 25% of your available credit, it's hurting your bottom line. Pay down as much debt as possible to improve the ratio. Also, check for report errors that can be removed and do not open new accounts.
Create a solid business plan
If you haven't already, develop a business plan that includes your business purpose, how it makes money, a growth strategy, detailed financial statements, cash flow projections and the purpose of the loan .. Many types of non-bank lenders will not ask you for a business plan.However, you must generate at least one year of strong sales. If you go to a peer-to-peer or marketplace lender, you have to show potential lenders why you would be a good risk.
Most non-bank lenders conduct business exclusively online. Although they all advertise fast loan approval and funding, such companies vary in different ways.
Financing types: Some lenders offer fixed-rate loans, while others offer variable-rate loans. You can also find lenders who offer lines of credit. Avoid cash advance funding, which is the most expensive.
Qualification: most non-bank lenders consider your credit score and business income, but they have different qualification levels. For example, one lender may require $100,000 in annual revenue for a full year, while another may only require $50,000 for half a year. They may also have different minimum credit requirements.
Prepayment fees: If your cash flow allows you to pay off the loan early, you don't want to pay a prepayment fee.
Credit reporting: some lenders report your payments to the credit bureaus, others don't. If you want to establish your credit history, ask if the lender reports payments.
Obtaining an unsecured loan from an online unbanked lender may not be nearly as difficult as from a traditional bank, but the cost can be significantly higher. To keep costs down, prepare as if you qualify for a bank loan. The better prepared you are, the better terms you are likely to get.