Before applying for a business loan, do your homework on both secured and unsecured loans. Which can best fulfill your needs, and which you are most likely to qualify for? Take a look at the U.S. Small Business Administration's primer on unsecured loans, which also includes tips on loans secured with collateral. Investigate online lenders, likely the best bet for a start up business to qualify for an unsecured loan. Compare interest rates, loan fees and terms as you compile your research.
Secured Loans and Collateral
A secured loan requires the borrower to put up collateral. The bank holds the title of the assets put up by the borrower as collateral for the term of the loan. Collateral might include a car, house, accounts receivable, equipment or inventory. In return for putting up assets as collateral, the borrower typically qualifies for a low interest rate. Should you default on a secured loan, you lose the collateral. Bear this in mind as you consider a secured loan.
Traditional banks are more likely to make secured loans to existing businesses. They want to see a good credit rating, and no bankruptcies or bad marks on your credit history. They prefer to lend to a business that has shown a profit for at least two years, with a detailed business plan for continued profitability and growth over the coming years.
Qualifying For an Unsecured Loan
You do not pledge collateral on an unsecured business loan. Small business lenders consider your credit rating and income. Online lenders are developing their own processes for qualifying borrowers, opening things up for entrepreneurs seeking funding. Research each prospective lender to see where the money comes from, whether it's banks, the government, a private financial institution or peer-to-peer. Carefully check their terms, fees and interest rates. Buckle down and read the fine print on any prospective loan agreement.
As the lender is taking a risk making an unsecured small business loan, interest rates tend to be higher than with secured loans. The term of unsecured loans tends to be shorter than a secured loan, what with the lender taking on risk. Loan amounts may be lower than with secured loans. Be wary of predatory lenders with unusually high interest rates for unsecured loans. With any lender, check whether the interest rate is variable or fixed.
Online Small Business Loans
Lending club is regarded as a top online lender, working with the peer-to-peer lending model. They offer a streamlined application process, and decent interest rates for borrowers with good credit. Those with low credit scores pay higher rates. OnDeck built it's reputation as a great lender for existing business with established cash flow looking for short term loans. Kabbage is a handy lender for businesses pulling revenue from PayPal, Ebay or Amazon, using online account information in their application process.
Look at the pros and cons of secured and unsecured loans as you consider which is best for you. Consider how much you need to borrow, and for what purpose? Prior to applying, check your credit report and correct any errors in it. Approach lenders with confidence in your position, and knowing exactly what to expect from them.