Unsecured Small Business Loans

What you need to do before applying for an unsecured small business loan

What you need to do before applying for an unsecured small business loan

Research shows the demand for unsecured small business loans has been rapidly growing over recent years. An unsecured loan creates new opportunities for small business owners who do not have any collateral to secure the loan.

Many startup businesses look for unsecured loans as a way of obtaining much needed working capital.  Working capital is the lifeblood of a business. Every business owner, whether they are a start up business or an old established business needs working capital.

The problem is, that most unsecured small business loans require good to excellent PERSONAL credit of the business owner. If the business owner doesn’t have good to excellent credit, the business owner should work on improving their credit score BEFORE they apply for an unsecured loan.

What kind of credit score is required

A business owners credit score can be adversely affected by the amount of outstanding loans and credit cards they have. Many start up business owners fund their new business by using their credit cards. So even though they may not have any negative tradelines on their credit report, they still have a low credit score due to being almost maxed out.

A business owner that is looking to get approved for an unsecured small business loan should strive to pay all their credit cards and personal loans to a zero balance. If that can’t be done, they should strive to bring their debt to income ratio down to 30% or below.

Keep in mind, credit card debt is one of the biggest reasons people are forced to declare bankruptcy.  When a bank sees a lot of credit card debt they will be hesitant to lend you any more unsecured financing.

What to do before you apply for an unsecured small business loan

Before applying for any type of loan a business owner should pull their credit report with score from all 3 credit bureaus and look for errors.

If there are any errors found they should dispute them immediately. You want to get your credit score above a 680 if you want a chance of getting a good loan. Ideally, your credit score should be over 700. The higher your credit score the more likely you will be approved.  Especially if you are seeking an unsecured loan.

Since there is no collateral involved, banks like to see a high credit score and know that the likelihood of default will be low.

Comparable credit

Comparable credit is what a bank looks at when you applying for a loan. Just because you have a 720 score doesn’t mean you will qualify for a $50,000 unsecured loan.

The bank will look for a credit line of close to the amount of your loan request.  Recently we had a client who while he had a 730 credit score, he only had 5 lines of credit on his credit report.  And his highest line of credit was $2,000 unsecured credit card.

So even though he had the credit score required, he didn’t have the comparable credit.   His credit file was also very shallow.  With the oldest line of credit about 3 years old.  You want to have comparable credit and a long credit history to show banks that you know how to handle your credit.

Tips for approval:

  • Increase your credit score.  Dispute all errors either yourself or hire a reputable credit repair company 
  • Add new tradelines to your credit report.  Many consumers have been having their rent added to their credit reports to add a substantial tradeline with a long history.
  • Contact a debt management company to help you reduce your debt load down to under 30%
  • Get a debt consolidation loan to consolidate your debt into one place
  • Pay down your credit cards. Often times paying them down will give your credit score an instant boost! You want to be using less than 30% of your available credit.
  • If you don’t have time to improve your credit, consider getting a secured loan or applying for an equipment lease.


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