Depending on the statistics, experts state that up to 9 in 10 businesses fail within the first 5 years. Furthermore, 90% of those failed small businesses close their doors due to cash flow problems.

When small businesses experience negative cash flow, they often look for alternative funding sources, such as loans. However, due to lack of research and preparation, many businesses struggle to secure additional capital.

To help, we have put together a little guide on securing a short-term unsecured business loan.

Unsecured Versus Secured

Firstly, what is an unsecured loan? In terms of loans, there are two types: secured and unsecured. The former requires assets which the lender will secure borrowed funds against in case of default. The latter does not require any collateral and as such, are popular with small businesses who often lack assets needed to obtain a secured loan.

Types of Lenders

After deciding to apply for an unsecured business loan, you must then consider lenders. You can choose from a variety of lenders, including traditional banks, online lenders, and peer-to-peer lending services.

Each form of lender offers their own advantages. For example, banks typically offer the best rates but require businesses to meet a long list of criteria. Alternatively, applying for an unsecured business loan with an online lender can be much quicker, with some securing funds in less than 24 hours.

But how do you apply for an unsecured loan? And what does your business need to pass the application process?

Repayment Ability

Any lender will check if your ability to make repayments by assessing your debt to income ratio – lenders usually prefer 33% or lower. As such, it is vital to ensure your current cash flow not only covers your current outgoings but also any new loan repayments.

Credit Score

Before applying, it is advisable to check your credit score. Lenders will use this to gauge your suitability and check for late payments, defaults or insolvencies, all of which will reduce your chance of securing a loan. If you can, boost your credit score before applying.

Period of Operation

The majority of lenders require businesses to have been operating for a minimum of two years. Before applying, ensure your accounts are accurate and up-to-date.

Cash Flow Forecast

Finally, in addition to seeing stable trading history, lenders may also ask for a cash flow forecast. The purpose of this is to provide the lender with a certain element of security.

An unsecured loan can boost small business cash flow. Follow the steps above to increase your chances of being accepted.