An unsecured small business loan is a type of financing that doesn’t require you to offer any assets (like equipment or property) as collateral. This makes it a good option for business owners who don’t have assets to pledge — or those who simply prefer not to risk their personal or business valuables.
However, since these loans pose more risk to the lender, they’re often reserved for borrowers with strong credit and solid business finances. In most cases, unsecured loans also have higher interest rates than secured loans.
Here’s a step-by-step guide to help you get an unsecured business loan that fits your needs.
1. Choose the Right Type of Unsecured Business Loan
The first step is to figure out what kind of loan is best for your situation. Different unsecured loan types serve different purposes. You’ll want to match the loan type to your business needs.
| Loan Type | What It Is | Best For |
|---|---|---|
| Term Loan | A lump sum of money you repay in fixed monthly installments over a set period. | One-time large expenses (e.g. expansion, new equipment) |
| SBA Loan | Government-backed loans with long repayment terms and low interest. Collateral may not be needed for loans under $50,000. | Businesses with limited access to traditional financing |
| Business Line of Credit | A flexible loan that lets you borrow up to a credit limit, repay, and borrow again. | Ongoing expenses, working capital, seasonal cash flow gaps |
| Invoice Factoring | A loan based on unpaid invoices. A lender gives you a portion of the invoice value up front. | Businesses waiting on payments from clients |
| Business Credit Card | A revolving credit account for everyday business spending. | Regular, smaller expenses that can be paid off monthly |
| Merchant Cash Advance | A lump sum repaid through a portion of daily or weekly sales (especially card payments). | Urgent funding when other options aren’t available |
2. Calculate How Much Loan You Can Afford
Before applying, it’s important to know how much your business can handle in monthly repayments. You don’t want loan payments to strain your cash flow.
Lenders often evaluate two main ratios:
- Debt-to-Income (DTI) Ratio: Measures what percentage of your revenue goes toward debt payments. Ideally, it should be 36% or less.
- Debt Service Coverage Ratio (DSCR): Compares your income to debt payments. A DSCR of 1.25 or higher is typically preferred.
Use a business loan calculator to estimate how much your monthly payments will be and whether they fit comfortably into your budget.
3. Decide How Soon You Need the Money
Your funding timeline can influence which lender and loan type are best for you.
- If you can wait: Traditional banks may offer better rates and longer terms but take longer — often a week or more — to process loans.
- If you need fast cash: Online lenders may approve and fund your loan within 24 to 48 hours. They use modern tech and alternative data to assess your eligibility, often accepting lower credit scores.
- If applying for an SBA loan: Expect a longer wait — between 30 and 90 days — due to the more detailed application process.
4. Compare Different Lenders
Shop around to find the lender that offers the best deal for your business. Consider these factors:
- Loan types offered: Make sure the lender provides the kind of loan you’re looking for.
- Interest rates and fees: Compare the total cost of borrowing, including the interest rate and any fees.
- Eligibility requirements: Check if you meet the lender’s requirements for credit score, revenue, and time in business.
- Repayment terms: Some lenders offer more flexible terms — from a few months to several years — and different payment schedules (daily, weekly, or monthly).
- Speed of funding: Online lenders usually offer the fastest approval and funding.
5. Gather the Required Documents
To apply, you’ll need to provide documentation that proves your business can repay the loan. Having all your paperwork ready can make the process faster and smoother.
Here’s what lenders typically ask for:
- Your name, contact details, and Social Security number
- Business registration documents
- Employer Identification Number (EIN)
- Business licenses or permits
- A business plan
- Bank statements
- Profit and loss statements
- Cash flow and income statements
- A list of current debts (payables) and pending payments (receivables)
6. Apply for the Loan
Once you’ve chosen a lender, gathered your documents, and confirmed you meet the qualifications, you’re ready to apply.
Take your time to review the loan terms. Ask the lender any questions before signing the agreement. Once approved, you’ll receive the funds — often via direct deposit — and can start using the money to grow your business.
Alternatives If You Don’t Qualify for an Unsecured Loan
If you’re unable to get approved for an unsecured loan or want better loan terms, consider these alternatives:
- Secured Business Loans: Use business assets (like inventory or equipment) as collateral. These loans typically offer better rates and longer terms.
- Secured Line of Credit: This works like a business credit card but requires a deposit or asset to secure the credit line.
- SBA Microloans or Specialized Lenders: Some SBA lenders focus on borrowers with poor or limited credit history. Platforms like Funding Circle or Creditfy may also help.
- Business Grants: Some organizations offer free money for specific types of businesses. These don’t need to be repaid but may take time to secure.
- Crowdfunding: You can raise money from the public in exchange for rewards, repayment (debt crowdfunding), or even company shares (equity crowdfunding).
- Peer-to-Peer (P2P) Lending: Borrow money from individuals instead of banks. You’ll still repay with interest, but the approval process may be easier.
Bottom Line
Unsecured business loans are a great option if you want to borrow money without offering assets as collateral. They’re best for business owners with good credit and healthy financials.
To get started, determine which type of loan fits your needs, research lenders, gather your documents, and apply. If you don’t meet the requirements or want more favorable terms, secured loans and other financing options are worth exploring.
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