Although banks have become more active in lending to small businesses over the years following the financial crisis in 2008, only the most creditworthy companies funding is considered, with most banks requiring some form of security to secure the loan. Such loan requirements create challenges for small 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, providing small companies with more access to funding than ever before, without the need for collateral.
Most all companies, regardless of stage or size, have access to unsecured funding through a number of alternative lending sources. Although they usually do not require any security, they charge higher interest rates than traditional banks. In most cases, you can qualify for funding based on your credit history and a record to generate a certain amount of revenue. While getting an unsecured loan through a non-bank lender may be easier than the preparation required for a traditional bank loan, there are still some important steps required to achieve the best possible terms.
Double check cash flow forecasts
If you do not have a high credit score and a strong record of revenue generation, it is likely to be burdened with a high interest rate on an unsecured loan. The effective interest rate (APR) can range from 10% for the most creditworthy borrowers to triple figures depending on the lender and the type of loan. Before looking for a loan, judge your cash flow forecasts so you have sufficient funds to repay it. Failure to repay the loan will damage your credit score, making it harder to get some type of financing in the future.
Clean up your credit
Clean up your credit report and raise your credit score. Although it is possible to get a loan without credit with bad credit, you will pay higher interest rates. The fastest way to raise your credit score is to lower your credit usage, which accounts for 35% of the score. The relationship reflects the part of the debt you carry in relation to the size of your available credit. If your total debt exceeds 25% of your available credit, it’s damaging your score. Pay as much debt as you can to improve the relationship. Also check for any reporting errors that can be deleted and not open any new accounts.
Create a solid business plan
If you have not already done so, develop a business plan that includes your business purpose, how it is money, a growth strategy, detailed financial reports, cash flow forecasts and the purpose of the loan. Many types of non-bank lenders will not ask you for a business plan. However, you must show a strong record of revenue generation for at least one year. If you go to a peer-to-peer or marketplace lender, you need to show potential lenders why you would be a good risk.
Most non-bank lenders conduct their business strictly online. Although they all advertise quick loan approval and financing, such companies vary in several ways.
Types of financing: Some lenders offer fixed loans while others offer variable loan rates. You can also find lenders offering credit. Avoid merchant advance financing, which is the most costly.
Qualities: Most non-bank lenders consider your credit score and business revenue, but they have different levels of qualification. For example, a lender may require $ 100,000 of the annual revenue for a full year, while another may only claim $ 50,000 for half a year. They may also have different minimum credit score requirements.
Prepayment Fees: If your cash flow allows you to pay off the loan in advance, you do not need to pay an advance fee.
Credit Report: Some lenders report your payments to credit bureaus, while others do not. If you want to build your credit history, ask the lender to report payments.
Obtaining an unsecured loan from an online, non-bank lender may not be nearly as difficult as with a traditional bank, but the costs may be significantly higher. To keep costs down, prepare to qualify for a bank loan. The better prepared you are, the better the conditions are likely to be.