If you’ve been in business for any length of time, you may reckon that it’s unusual to be approved for fast business loans. Unsecured business financing delivered quick, you may believe, is nonexistent.
But by researching unsecured business loans, we quickly find that these “beliefs” are really myths. There are a wide range of financing resources available today that provides fast cash needed to run a successful business. While banks and credit unions haven’t changed their loan approval process much over the past decade, online lenders have stepped forward to offer fast business loans – unsecured and secured – to companies that need a cash infusion.
Small Business Success Rates in the U.S.
According to the Bureau of Labor Statistics (BLS), small business success and failure rates are consistent since 1994. These statistics tell us that roughly:
To understand the practicality of the rise in online lenders, we must understand why business failures consistently increase from 20% in the first year to 70% by year 10.
Top 4 Reasons Small Companies Fail
The top four reasons for small company failures according to Investopedia are:
One trait that these causes for business failure have is that they can be quickly remedied with working capital reserves or reliable business financing solutions. As the reasons for failure are never fully resolved throughout the business lifecycle, it’s important for owners to have access to fast business loans, unsecured or secured, to prevent becoming another business failure statistic. Many online lenders will pre-approve small business loans that can be accessed quickly when needed.
Why are Fast Business Loans – Unsecured and Secured – So Important?
According to the Federal Reserve Bank of New York, non-employer small companies represent 81% of all small businesses nationwide and provide income to 17% of U.S. workers. They are an important player in the economy. But more than half of these small companies’ experience “significant obstacles” in accessing capital.
In it’s 2019 Report on Employer Firms, the N.Y. Federal Reserve reported that many firms “experienced revenue growth” and added employees in 2018. Further, they projected strong growth potential for the future but found it difficult to acquire sufficient credit to take advantage of opportunities.
Those companies unable to secure sufficient financing typically have low credit ratings or are start-ups. The funding gap for these businesses ranged between $100,000 to 250,000.
Increasingly, these companies are turning to online lenders to finance their operations.
Those with medium- to high-credit risk are finding it easier and faster to get approved for secured or unsecured business loans through alternative lenders.
The Difference Between Secured and Unsecured Business Loans
The primary difference between secured and unsecured business financing is collateral. For a variety of reasons, some business lenders want collateral as surety for the loan. If the loan is not paid, then the lender seizes the asset(s) the owner put up as collateral. The lender then sells the asset(s) and uses the proceeds to absolve the loan.
Unsecured business loans require no collateral. The financing is approved based on the information provided on the business loan application and a credit check. They are sometimes referred to as “signature loans.”
The lender determines whether the business loan is secured or unsecured based on their risk analysis process. For those companies with weak credit or a short term in business, the lender will likely require collateral as security to reduce the risk. More established businesses with moderate to good credit over several years may qualify for fast unsecured business loans.
There are several alternative business financing options so having a weak credit score and insufficient collateral does not preclude you from getting approved for a loan. Fast business loans, unsecured and secured, through online lenders are designed to get the cash you need to succeed. As we discuss below, you’ll be surprised as to what can be used for collateral if not approved for unsecured business loans.
Types of Fast Unsecured Business Loans
There are three unsecured business loans that can be approved on average less time than other credit lines.
Long-term Business Loans
Long-term business financing is an option for some borrowers. This type of loan is primarily used for big-ticket purchases like a major business expansion, machinery and equipment. Repayment terms are spread over a longer timeframe to correspond with the projected return-on-investment of the assets purchased.
The duration of a long-term business loan can range from 3 – 30 years. A strong credit history is typically required for no-collateral business financing. A credit score of 740 and up will put the borrower in a good position to be approved. We discuss alternative commercial loans such as equipment financing for those with moderate to poor credit scores below.
Short-term Business Financing
Short-term commercial loans are also referred to as “working capital loans” because the proceeds are used for general operating costs. This type of loan is typically used as bridge financing. For example, borrowing funds to “bridge” the gap while waiting for customer payments, to finance a seasonal downswing or prepare for a seasonal upswing. Used wisely, fast unsecured business loans can play an important part in stabilizing business operations.
Short-term business loans are generally easier to qualify for even for those with moderate to poor credit scores. The reduced term limits, generally 3 – 18 months, poses less risk to the lender. Applicants with credit score of at least 580 are encouraged to apply. As discussed below, there are other criteria that online lenders analyze in the loan approval process.
Unsecured Business Line-of-Credit
Another option for commercial borrowers is the unsecured business-line of credit. A line-of-credit operates much like a company credit card or bank overdraft. The lender approves a fixed amount that can be borrowed. The business owner can then use and pay back the funds as needed. A credit score of at least 580 may be eligible depending on other factors discussed below, but a score of 670 and above is typically required.
Loan Approval is Not Just About Credit Scores
Online business lenders consider more than just credit scores during the loan application process. Reputable online lenders are aware of the struggles an entrepreneur endures in making a business viable. It’s not always easy to pay the bills on time particularly during the start-up phase. Hard times can make a significant impact on the company’s credit score.
Online business financing firms are more interested in future results than simply credit history. They want to know that you’re a going concern and will be able to meet your loan obligations in the future. They place more emphasis on a company’s ability to make timely payments in the past year than the cashflow struggles of three years ago.
Other Considerations to Get the Green Light on the Loan
Sales Revenue – Business Lenders want to know that the company’s turnover can support repayment of the loan. Having a steady revenue growth pattern over several years will work favorably for loan approval.
Net Profit – A company must earn a profit in order to repay the loan. If the company can’t cover its expenses as it stands then they’re not likely going to have the cash flow for an additional expense.
Cash Flow Analysis – Cash flow can fluctuate month-to-month depending on the industry and contractual obligations. For example, seasonal businesses will often have months with high and low cash flow throughout the year. Business lenders want to know that the company generates positive cashflow as a result of profitability over time.
Current Debt – High current debt loads combined with an application for more credit are a signal to the lender that the company is not operating efficiently and deemed high risk. Having debt is normal if there’s cash flow to support it. The lender may require a debt consolidation in order to approve the business loan.
If your business loan application is denied then you can investigate other fast business loans, unsecured and secured, that may serve your purpose.
Alternatives to Fast Business Loans – Unsecured and Secured
Unsecured Merchant Cash Advances (MCAs)
As the name suggests, merchant cash advances are considered an “advance” rather than a commercial loan. It’s one of the quickest business financing options for those companies with bad credit and looking for working capital to fund operations.
This short-term funding option places more emphasis on future sales revenue rather than past credit history. In this scenario, the lender analyzes past daily, weekly, and monthly sales revenue averages to calculate the high end of the loan amount. The borrower decides how much of a cash advance is needed up to the maximum amount.
Merchant cash advances are available for any credit score, even bad credit, if the company has enough future sales revenue for repayment. Typically, a company must have a minimum of $10,000 per month in sales to qualify. Business cash advances can range from $10,000 to $2-3 million.
Secured Accounts Receivable Financing
Another consideration for bad credit applicants is invoice financing. In this business lending scenario, the company’s accounts receivable act as collateral for the loan. It’s a form of bridge financing until customers pay their invoices. The lender discounts the face value of the invoices and advances the cash until the invoices are paid. Typically, discount rates range from 75-90%.
Equipment Financing – Secured
Big-ticket equipment purchases can put a significant strain on a company’s resources. If the company doesn’t qualify for an unsecured business loan, then equipment financing may be a reasonable option. Like financing a new vehicle, the lender uses the purchased asset as collateral for the loan. If the loan goes into default, the lender will seize the asset for repayment. Equipment lenders typically want a 10-20% down payment to ensure the asset is worth more than the loan amount.
Last Words on Fast Unsecured Business Financing
In the past fast business loans, unsecured and secured, may have been true. Business loan applicants went through a similar approval process through both banks and credit unions. The online world we now live in has changed traditional rules. Alternative lenders can process commercial loan applications online and decide in as little as 48 hours.
Unsecured business loans have a higher standard to meet than secured loans. Companies with good credit scores and a history of business operations have the advantage for this type of loan. Those with poor to bad credit scores may still qualify if they can show that their sales and profitability are growing and that they’ve been meeting their current obligations.
But even companies with bad credit don’t have to give up on their dreams. Merchant Cash Advances, invoice and equipment financing can solve most companies’ immediate cash flow problems.