Borrowers can get a business loan if they are unemployed, but their chances of getting approval are multiple.
Rob Sunford, founder of 29doors.com and former commercial banker, said finding funding while he was unemployed is “difficult but not impossible.”
He added that most lenders follow the “five criteria” for underwriting loans: nature, capacity, capital, collateral and terms.
“Generally, financing a new project or a new business with a loan can be achieved provided you demonstrate a viable source of repayment,” Sunford said. “If you can convince them that you will have no problem repaying the loan, whatever your job, then you will have a better chance of getting financing.”
The means to obtain financing as an unemployed borrower can be contradictory. Sunford said that one of the ways to get financing is to be independently rich. He stated that most business loan applications came from entrepreneurs who were self-employed in another company with a history of operations.
Jeanette Dagas, a chartered accountant in Florida, assists clients in preparing business plans that will be presented to banks when applying for a commercial loan. She agrees with Sunford that, despite this seemingly paradoxical decision, it is true that banks want to lend to a person with stable funding.
She added that banks must achieve certain goals in order to lend money responsibly. Although unemployment is not a decisive factor, other factors can weigh heavily on loan demand. If a borrower is unemployed, receives no other source of income and expects to obtain a large unsecured business loan, it is considered a very risky business for the bank.
“Cash flow is an important consideration for a banker. A stable job is therefore primarily a source of repayment for the bank, “said Dagas. “In addition to that, it could indicate a level of experience and success in a given sector or industry.”
Sunford said the next way to get funding is to demonstrate a viable idea. Borrowers must present a well-developed business plan and provide an adequate financial history for the lender’s review.
The third step for a borrower is to illustrate a logical repayment plan. Banks focus primarily on the risk factor and it is important to have a repayment method. If borrowers can prove some form of income, as well as larger collateral to secure the loan, their chances of getting approval increase.
The last method is to convince other wealthy individuals to secure the business loan as this will give them more credibility and strengthen the underwriting process.
“Banks are looking at historical financial performance to determine the amount of a loan,” said Sunford. “If you have a solid track record, a net worth, high liquidity and a viable project, you will likely get a loan even if you do not technically receive a pay check from a company.”
Startups and new entrepreneurs
But not all companies are the same: lenders perceive startups and existing businesses differently.
Sunford advises new entrepreneurs with no significant personal credit history or external financing to avoid business loans. In his experience, start-up business loans are the most risky.
“The chances of success of a new startup are low, so the odds are against you,” he said. “Instead of going into debt to finance a risky start-up, you’d better find other sources of financing. By avoiding debts, you improve your resilience and your ability to stay in the game and you continue to beat the bat instead of paying off your loans. “
Alex Gadinik, founder of the problemio.com marketing application website, said that loans are an important topic in apps. He agrees with Sunford that business loans are generally out of the question for new entrepreneurs.
“Neither banks nor private lenders will lend them, because the risk profile of a company that has not started yet is extremely high,” he said.
Gadinik said that the failure of companies at the idea stage is around 99% because entrepreneurs never follow through on their idea.
“Giving money to this project is almost like throwing it away,” he said. “A loan is like a firearm with which an inexperienced person can shoot himself in the foot. Similarly, an inexperienced entrepreneur wastes a lot of money making bad decisions and lacking know-how. “
Gadinik said that if an entrepreneur still needed a loan, he could take out a personal loan and use the funds for his business.
Beyond personal loans, another option for refused applicants is to turn to their local government. Some local governments, with the aim of stimulating a certain part of the economy, offer financing to businesses. A city that wants to develop its artistic community could offer business loans to a future art gallery owner or a dance studio.
How unemployment benefits affect a loan
For some jobless entrepreneurs, collecting unemployment benefits may further complicate their plans to open a new business.
According to the SBA website, starting a business by accepting unemployment benefits falls into a gray area because of the concept of full-time work versus part-time work.
State laws, which regulate the rules on unemployment benefits, focus on a person’s work schedule and not on work in particular. If a person works full-time in a new business, some states have rules that prohibit them from collecting benefits, even if their income is lower than their previous job.
Some states have self-employment assistance programs that help new entrepreneurs during this period.
Entrepreneurs can use self-employment assistance programs when they are unemployed. This program allows future unemployed entrepreneurs to access financial assistance equal to their unemployment insurance benefits. Assistance, including financial assistance and training resources, lasts up to 26 weeks.
With or without unemployment benefits, most borrowers face some opposition when applying for a commercial loan. It’s part of the struggle to be a business owner. Although the process can be long and risky, unemployed consumers with an imaginative and realistic business plan should seek funding and support in whatever way they can.