Unsecured Start-up Business Loans - Bad Credit
There are a lot of start-up businesses that need funding but lack the credit rating to get traditional financing from banks and other lenders. These companies need money in order to put their ideas into action, from buying the materials needed for production to paying employees and everything in between.
Fortunately, there is a way for companies with bad credit to get the financing they need. Unsecured start-up business loans are a great way to secure funding for your business if you have bad credit or no collateral.
The following guide will walk you through the process of applying for an unsecured start-up loan with bad credit, explain the criteria lenders use in their decision-making processes, and provide information on how much you can expect to borrow.
- Min Credit Score
- Business Revenue
- Time in Business
Lendio
- 550
- $10,000 per month
- 6 months
BlueVine
- 530
- $10,000 per month
- 3 months
Fundbox
- 600
- $100K/year
- 6 Months
- APR range
- Fees
- Terms
- Amounth
- Unemployment protection
Bank 1
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 2
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 3
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Table of Contents
What is an Unsecured Startup Business Loan?
When you apply for a personal loan, an online lender requires certain documents to determine a few things like your identity, income, and expenses. Typically, you would be asked to supply a form of identification like your passport, driver’s license, etc. Sometimes, your Social Security number is enough.
Income proof may differ from lender to lender, but their goal here is to ensure that your earnings are stable enough to support your current expenses or other existing debt obligations. Some lenders require a low debt-to-income ratio plus a good credit score, but, again, it may vary by the lender as some borrowers can get an online personal loan even with a low credit score.
A form of identification can be your passport, driver’s license, etc. Sometimes, your Social Security number is enough.
Requirements to Qualify with Bad Credit
Just like any other loan, you will need to provide certain requirements and documents for approval. The following is a list of the most common:
Just like any other loan, you will need to provide certain requirements and documents for approval. The following is a list of the most common:
● Proof of income: This is probably the most important aspect of the entire application process. This is what lenders use in order to determine if your company can afford repayment or not. You would need to prove that you’re capable of providing income on a regular basis. If you don’t have any income, it’s not advisable for you to apply because the default rate would be very high.
● Proof of residence: A lot of lenders require borrowers to show their proof of address. Again, this is needed in order for them to determine if they can trust you and your company.
● Proof of business: This simply means that you need to show some evidence that you’re in the market. It could be a copy of your business permit or registration documents; anything that would prove that you really own a company.
● Business plan: Banks require borrowers to prepare a detailed business plan regardless if it’s unsecured or not. But in this case, it’s particularly important because the lender needs to see if your proposal can work or not.
● Good Credit Score: This is the most important thing that lenders would look at when it comes to unsecured business loans because if you don’t have a good credit score, it would be very hard to get a loan from them especially if you’re just starting out. A minimum of 700 is usually required in order for the bank or lender to approve your application.
Ways to Get an Unsecured Startup Business Loan
● Personal guarantee
Borrowers who don’t have any valuable assets or collateral can get an unsecured startup business loan with the help of a cosigner. This is usually where close friends and family members come in to back you up financially. If you can’t repay your debt, the cosigner will be legally bound to pay for it.
● Collateral
Aside from guaranteeing your loan, collateral is another way for you to get your hands on an unsecured startup business loan. This means that if you can’t pay any of the monthly or periodic payments, the lender has the right to seize something valuable that you own. The safest form of collateral are assets like jewelry and antiques since they would likely retain their value even after a period of time.
● Credit score
The most common way to get an unsecured startup business loan is through your credit report and score. This means that you will need to build up your credibility by maintaining good terms with the creditor and allocating more money towards paying it back. If your credit score is high enough, it can be used as leverage to get you approved.
● Terms of repayment
Another major factor that banks or lenders look into are the terms of repayment. This means that they would have an idea on how much you owe and when the first payment will be due. Other things like interest rate and penalties will also be discussed before finalizing a contract.
Types of Unsecured Start-up Business Loans
Besides the basic unsecured startup business loan, you can get other types depending on your needs.
● Personal Loan: This is one of the most common types of unsecured startup business loans, wherein normal moneylenders are offering their services to people who are in an urgent need for cash. It’s advisable that you only borrow what you really need because this will cause your loan to be repaid faster.
● Family Loan: This is another way for you to get an unsecured startup business loan without the need of collateral. However, this would mean that your family members will be playing a huge part in your financial decisions so it’s important that you trust them completely.
● Credit Card: You can also consider using your credit card or debit card as an unsecured startup business loan. It’s one of the easiest ways to get funds since all you need is sufficient credit limit and a steady source of income. However, this option also comes with higher interest rates compared to other forms mentioned above.
● Peer to Peer Lending: This form of financing has been growing in popularity for the past few years as an alternative to traditional lenders. Social lending sites like Lending Club and Prosper will connect you with other individuals who are looking forward to investing in your project or business. Their rates of return might be higher compared to those from banks, but this is a good option if you need cash immediately.
● Microlending: With microlending, you can get an unsecured startup business loan without the need to provide collateral. This is because it comes with minimal requirements which makes them accessible to millions of borrowers around the world. Some examples of these are Kiva and Grameen Bank.
How to Improve your Credit Score
If you’re looking to get an unsecured startup business loan but your credit score isn’t that high, then taking steps to improve it is something that needs to be done. On average, banks would hold applicants with 700 or more credit scores in greater regard than those who don’t meet this requirement.
● Stay on top of payments: One way to improve your credit score is to show that you’re good at paying back loans. If you’ve been making timely payments with your existing accounts, then it should reflect well on your credit report and score.
● Pay other debts: Banks and lenders will also apply a certain weight to the amounts of debt you owe. This means that if you can pay more on your other accounts, then it would be easier for you to get approved for a startup loan since the credit report and score will look better overall.
● Apply for an unsecured business loan: Another way to improve your chances of getting approved is by applying for an unsecured startup business loan. Since the lender doesn’t have any type of collateral, then your credit score isn’t that important which makes it easier for you to get approved.
● Don’t close accounts: Before you apply for an unsecured startup business loan, make sure that your other accounts are still open and active. Closing accounts can reflect badly on your credit report and score because it shows the lender that you’re no longer able to pay back loans.
● Rebuild: What’s important is that you don’t go ahead and close all of your accounts since this would show a negative effect on your credit score. Instead, try to rebuild your credit score by making timely payments and building a good rapport with the creditors.
● Check: Before trying to get an unsecured startup business loan, make sure that your credit report is accurate. A lot of lenders don’t perform a thorough check and this means that errors might slip through the cracks. It’s going to be a lot easier for you to get approved if your credit score is 700 or higher.
Taking care of your Credit Score will allow you to borrow a higher amount of money from different lenders.
Pros and Cons
Pros:
● Reasonable interest rates: The interest rates for unsecured startup business loans with bad credit is also reasonable. Since there’s no collateral, the lender doesn’t have to be as stringent when it comes to processing your application and this will reflect in the interest rate that you end up paying.
● No collateral: There’s no need to worry about providing any type of collateral when applying for an unsecured startup business loan. This makes it easier for you to get approved without worrying too much about not being able to provide something of value.
● Easier to get: Loans aren’t just given to those with perfect credit. In fact, many lenders are willing to take a chance on those with poor credit as long as they have a steady source of income.
● Flexibility: Since there’s less paperwork involved with an unsecured startup business loan, the process is also faster. This means that you won’t need to wait for days or weeks before you can get your money which makes it easier to cover any emergencies that might happen during the early stages of your startup business.
Cons
● Higher interest rate: The interest rate might be lower than other types of loans but it is still higher when compared with having a good credit score. This means that you’ll need to make timely payments so you can avoid any late fees and penalties.
● Higher risk: One of the most obvious disadvantages of getting an unsecured startup business loan with bad credit is the higher risk. Since the lender lacks collateral, they are more likely to reject your application if there are any errors on your credit report or score.
Unsecured Startup Business Loans with Bad Credit Alternatives
Even though there are a lot of reasons to get an unsecured startup business loan, some people will still be turned down. This is because the lender doesn’t have any collateral and this means that they’re going to go with someone who has a better credit score since it lowers the risk.
● Credit cards: One of the best alternatives to consider when you have a bad credit score is getting a credit card. If you can get approved, this is going to be an easy way for you to handle your expenses in the meantime until your business starts generating cash flow.
● Business loan: Another alternative that you can try is applying for a business loan. Even though it’s against the rules to use this for expenses like buying equipment, you can still apply since some lenders are willing to make an exception.
● Peer-to-peer lending: One of the newest alternatives that some people are trying out is peer-to-peer lending or P2P lending. This works by having members of the website lend money to each other. In most cases, you can get lower interest rates and approval can be quick as long as you meet their criteria.
● Family and friends: Another alternative that a lot of people try is asking their family and friends for a personal loan. If successful, this can be a good way to get the startup business loan amount that you need.
● Savings: For most people, this is going to be the final option and it’s not necessarily bad either. Even though you’ll only be able to borrow a small amount, this will allow you to make monthly payments until your startup business generates cash flow.
Frequently Asked Questions (FAQ)
The best way to look for a lender is by searching online since there are quite a few who will approve your application even if you have a bad credit score.
Anything above 650 is admirable among most lenders. However, many of them, like the ones listed above, will gladly consider anything lower.
Getting an unsecured startup business loan is usually faster compared to other loans. However, this depends on the lender in question.
When you’re getting an unsecured startup business loan, you can’t use any kind of collateral so it’s going to be based on your overall ability to pay for the loan. If you have a good credit score and other financial documents that show proof of income, this will work in your favor as well as having a decent amount saved up.
You can’t receive tax credits when you’re borrowing money for your business but this doesn’t mean that it’s not beneficial.
