Can I get a business loan if I am unemployed?

It is possible to take out a business loan if you’re unemployed, but remember the requirements you must meet for lenders to trust your ability to make on-time payments. Since everyone’s situation is different, it may be easier for some and challenging for others to obtain a business loan.

This article will illustrate the requirements to get a business loan and if it will be easier or more challenging for you to get a loan. 

Can I get a business loan if I am unemployed?

Although not impossible, getting a business loan may be difficult if you’re unemployed. You can still get a business loan if you’re unemployed, but you’ll need to prove good credit and an additional source of income. By showing this, lenders will trust that you can make regular payments on time.

Lenders will consider providing you with a loan — whether you are unemployed unexpectedly or by choice — if you can show them you can meet the payments on time.

Demanding Requirements for a Business Loan 

Accessibility to a business loan depends on your situation. For example, if you already established a business before becoming unemployed, you may qualify for a business loan. 

However, if you recently began your new venture, it may be difficult to access a loan because without an income or set revenue and credit, lenders won’t be so willing to provide you with funds.

Below is a list of lenders’ considerations when determining eligibility for a business loan.

Business Credit Profile 

Dun & Bradstreet, Experian, and Equifax offer business credit scores that fall between 0 and 100. It can take many months to three years to build a business credit score, meaning it’s challenging for startups to obtain finance solely based on their credit scores.

Since the business owner personally guarantees many business loans, lenders frequently look at an applicant’s individual credit rather than their business credit profile. If you have an excellent personal credit record and are willing to guarantee repayment of your company loan personally, this may work in your favor. However, if you have poor credit and just lost your consistent income, the criteria may be difficult to meet.

Annual Business Income Record

Business lenders examine an applicant’s annual income streams during the application and underwriting process to determine their capacity to make consistent, on-time payments. Since it’s difficult to prove annual revenue without transactions or current clients, new firms generally have a more challenging time applying for a loan.

Fortunately, a great business plan illustrating the company’s financial health and potential for future growth can help you overcome this obstacle. Young firms may prefer secured loans, such as equipment finance, since the lender bears lower risk, making the loans easier to obtain.

Business Timeframe

Lenders consider how long a company has been in business before approving credit since it displays success to lenders and better prospects of completing scheduled payments. Businesses in operation for at least one to two years have a higher approval rate than newer businesses. Many startup loans demand companies be in business for at least six months.

In an organization, it’s hard to lie about time. Hence, a way around this is to buy an existing business rather than starting from scratch, allowing you to demonstrate annual income and your potential to perform loan payments. However, this isn’t an option for everyone, and it may not be a viable alternative if you’re purchasing a struggling or failing business.

Using Collateral for Secured Loans 

Business collateral — such as costly equipment or real estate — supports several business loans. If the borrower defaults on a secured loan, the lender can confiscate the collateral. This loan type decreases the lender’s risk level and makes it easier for the applicant to qualify, particularly young business owners with little to no revenue or credit history.

You might be able to receive a personal loan instead of a business loan if you don’t have any business assets but have access to other collateral, such as your home. Similarly, suppose your spouse still earns a typical salary and has a debt-to-income ratio indicating the potential to make extra loan payments. In that case, you may be eligible for a personal loan.

What do lenders require when applying for a business loan while unemployed?

The documents lenders expect from you vary by lender. Still, most will request copies of bank statements and additional financial statements to prove the business’ financial security and ability to make loan payments. If you’ve never applied for a business loan and want to know what documents you need, here’s what lenders may ask of you:

Tax Returns

Other sources of capital — such as financial inflows from shareholders and other lenders — are included in a company’s tax filings. Lenders typically want at least three years of tax returns for the business loan application process, and alternate lenders may also request tax returns before issuing a company loan. A tax specialist may be able to help you establish income predictions if you’ve just launched your organization.

Financial Statements

Additional financial records might give lenders a clearer view of a business’s risk. Profit and loss statements, a balance sheet, and cash flow statements are all examples of financial records. Lenders may also require financial statements to back up your estimates.

Licenses, Permits, and Business Registrations

Lenders frequently demand applicants to submit operating documentation, such as articles of formation for a limited liability company. Similarly, if your firm requires any licenses, present them to the lender so they can verify your identification and the legitimacy of your company.

Bank Statements

Bank statements can show a company’s previous cash flow, cash on hand, and assist lenders in projecting future profits. Typically, lenders like to see three months to three years of bank statements, but this may not be achievable if your company is just starting.

Business Plan

A business plan — particularly for fledgling enterprises — can assist lenders in a greater understanding of an applicant’s economic position. If you’re applying for a loan without any proof of income, ensure you have a complete business plan containing a definition of the company’s products and services, competitor analysis, target market analysis, and marketing strategy for achieving sales targets.

Other Documents

Lenders want to know the company’s existing debt obligations when considering loan applications to help them lower the risk of lending. It can give the lender peace of mind that the company can pay off its previous debts and new loan installments.

Getting a Business Loan While Unemployed

Getting a business loan while unemployed is possible but won’t be easy since you’ll need a solid business credit profile, which can take months or years for a business to build. Lenders require this to ensure you can meet payment deadlines. 

Remember that the documents required to apply for a business loan vary by lender. Therefore, obtaining a business loan could be easy or difficult, depending on your specific business, employment status, and lender situation.