When businesses are running short on cash, loans are usually amongst their top go-to options. If not for the long run, a loan does come up with a temporary financial cushion for sure. However, not all businesses are lucky enough to get the required funding because they have nothing to put as collateral.
If you are undergoing a similar trauma, an unsecured business loan can be the best alternative for you. In fact, unsecured business loans are particularly designed to cater to the needs of business owners who have no worthwhile asset to keep as collateral. Having said that, you can’t be shabby while applying for this loan
You need to keep up with the following step by step guide in order to boost your chances of approval:
1. Determine the reason for funding
Like any other type of loan, it is important to map out the reason behind taking an unsecured loan. The clarity of purpose will help you to determine the exact amount you need – nothing more, nothing less. The proper calculation will save you from making extra money, which will be liable to the interest rate.
Typically, entrepreneurs take an unsecured loan to look after their following business needs:
Expansion of business is one of the most triggering reasons to go for an unsecured loan. It covers objectives like hiring staff, buying equipment, shifting offices to another place, and so on.
Since the repayment duration of an unsecured loan is usually shorter, businesses apply for it to boost their credit rating. A quick and timely repayment is the key to improve credit history.
Do you have a hard time to meet day to day expenses? an unsecured business loan can tackle the cash flow issues very effectively.
Your business requirements could vary from the above list. However, an unsecured business loan works the best when you need it for a brief period. The reason being, it comes with relatively higher interest rates and stretching it for too long can do more harm than good. Therefore, before dipping into the process, you must make a principled stance to pay off the loan at the earliest.
2. Assess your qualification
Though an unsecured business loan does not require collateral, yet, a vast proportion of business owners are denied the loan. Not because lenders don’t like their faces, but simply because they fail to meet the minimum criteria. You don’t have to be a financial expert to run a pre-qualification check on your own.
Credit score: A solid credit score is the first pre-requisite. There are multiple ways to fetch your credit report for free. Consider applying for the loan only if you have the credit score that reaches the mark of 600. If your business has not operated for enough time to form its own credit score, then lenders might ask for a higher personal score.
Business history: Generally, lenders would want to be assured that you have been running an enterprise for about 1 to 2 years. Still, some lenders can approve your loan application if you can convince them through a formidable business plan or good cash flow track record.
Sales: Lenders would want to confirm how much you are earning before making the final decision. For example, it is unlikely to get a loan of 100,000 dollars if your sales hardly reach 50,000 dollars a year. To be on the safe side, lenders will only sanction you a small percentage of your total business revenue.
We have talked about the standard process here. Sometimes a small thing can elevate the lender’s confidence in you, and he can go out of his way to fund your business. So all is not lost even if you marginally fall short of these requirements.
Pick the right type of loan
There are various types of unsecured business loans. If one of them is good to solve cash flow issues, the other may be more suitable to buy office equipment. Depending on your specific necessities, you should pick any one of them. Needless to say, the wrong selection of loans can add to your problems. Some of the unsecured loans are listed below:
Invoice factoring
Business lines of credit
Commercial loans
Working capital loans
4. Prepare documents
According to the process, you will have to submit some documents alongside your loan application. Oftentimes, people prepare their documents at the last minute and, as a result, they have to wait longer for approval. Besides, when you commit mistakes in your documents, it does not send good vibes to the lender. It might force him to reconsider whether you are a responsible borrower or not.
Therefore, it is safest to stay on top of the following documentations:
• Personal as well as business tax returns
• Bank account details of the business and the owners
• Comprehensive business plan
• Repayment process of the borrowed amount
• Detailed profit and loss statements of your company
• If you are entitled to any other debt, show the debt schedule
Some lenders might not ask you to bring the plethora of all the above documents, but you should not take a chance.
5. Confirm terms and conditions before signing the dotted line
Once you submit the loan application along with necessary documents, the lender will weigh down your eligibility against his criteria. If the loan is approved, you should not forget to read the terms and conditions of repayment out of excitement.
Since the loan agreements are mostly crafted by the lenders, you should go through them carefully. If there are any questions in your mind, don’t leave them unaddressed. Such an approach might lead to conflicts in the future. plainly put, you should not put your signature unless you are free of all the doubts.
The final thought
At times, the need for capital is so urgent that it can literally make or break your business. Due to its fastpaced process, an unsecured business loan can rescue you in such difficult times. In no time, not only your business will breathe a sigh of relief, but it could be back on track to compete with the rivals. Walking the tightrope of the above-mentioned steps will make you stand out from the other applicants.
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