Step 2: Choose the right type of loan
Choosing the right type of unsecured loan can feel overwhelming, so we’ve broken it down into the main types available.
SBA loans are backed by the government’s U.S. Small Business Administration (SBA). While the SBA doesn’t lend money itself, it teams up with approved lenders to give qualified borrowers lower rates and better deals on loans. The SBA usually requires collateral (and that collateral will help you get those better rates), but you can use a personal guarantee instead with the SBA 7(a) loan program.
The SBA decides whether you’re qualified for a loan from one of its lenders, and your credit score plays a large part in getting approved. So if you use that option, make sure that your credit history is strong (for the SBA, credit history includes whether or not you’ve been rejected for loans from other traditional lenders). If that credit history is strong, though, you can have your loan in 5–10 business days.
A business credit card works similarly to a personal credit card and may be one of the simplest options if you don’t want collateral. Business credit cards are essentially a line of credit attached to a credit card, so it limits the way you can spend your loan (for example, you can’t use it for payroll). But it can be an easy option without too much hassle, especially if you have an excellent credit score.
There are lots of credit card choices out there, so choose one with benefits and fees that will best serve you and your business before you apply for a business credit card.
A line of credit is a loan that allows you to borrow up to a specified amount, and when you repay the loan, you pay interest only on the money you actually spend. The nice thing about lines of credit is that they can be used in a lot of different ways, from paying for equipment to even covering your payroll.
But brands that offer lines of credit often require collateral, so you’ll be limited in the brands and rates you get when it comes to options without collateral. One brand that offers an excellent line of credit without requiring any collateral is Kabbage, whose line of credit comes with a Kabbage Card. Kabbage provides the best of both worlds: a business card that isn’t limited to what a typical business credit card would be.
Merchant cash advances (MCAs) are by far one of the most expensive loans you can get when it comes to interest rates, but they are the one type of unsecured loan that is truly unsecured—no personal guarantee or blanket UCC lien.
That’s because merchant cash advances work so that you get a sum of money up front, and then the lender takes a portion of your daily credit card sales until the loan is paid off. So while you don’t have to put anything on the line for security, you do sacrifice a large portion of your future cash flow, depending on what size loan you take.
Merchant cash advances can be risky, but they can also be great for fast cash. One of our favorite brands for just that is CanCapital, which not only doesn’t require a personal guarantee but also doesn’t require a credit check.
Equipment financing is when you borrow funds to buy additional equipment (any tangible resources or materials your company needs, ranging from company cars to copy machines). It doesn’t require additional collateral because the equipment itself acts as collateral if you default on the loan.
If you need funds for additional equipment, this will likely be the most convenient route for you. Lendio is our favorite online marketplace to compare options for equipment financing.
Equity financing essentially means that an investor, such as an angel investor, provides the funds you need, and in return, you give your investor a potential stake in your company (either some ownership or a share). If you don’t want to give up a portion of your business, this may not be the right choice for you.
But if you aren’t against it (maybe the fact that you don’t have to repay the loan sounds promising), or if you know personal friends or family who could be excellent investors and a good match for your company, this could be an easy way to get the funds you need.
Peer-to-peer financing means that instead of borrowing through a bank loan or even an alternative lender, you lend and borrow directly with other investors through online platforms.
For this financing, you usually need excellent credit history, and the investors will charge high interest rates. But you don’t have a lot of added fees, and there’s no collateral necessary. Peer-to-peer financing is the most direct loan you can get—if this appeals to you, we recommend going to Lendio to find the best options available.
Similar to peer-to-peer financing, crowdfunding allows you to raise business funds from a variety of people through online crowdfunding platforms. This is a good choice for startups that may need to be more creative in finding funds. You don’t need collateral to get on most crowdfunding websites—you just need a promising idea and business plan to convince people to help fund your small business.
While you can legally raise up to $1 million with crowdfunding websites,1 crowdfunding is also really good for microloans, so it can suit your needs, whether they be big or small. If you’re looking for a good crowdfunding website to get you started, Kiva is one of the best out there.