Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Aug 3, 2021

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Borrowers can get a business loan if they are unemployed but there are multiple facets impacting their chances of approval.

Rob Schmidt, founder of 29doors.com and a former commercial banker, said securing financing while unemployed is “difficult but not impossible.”

He said most lenders, like banks and credit unions, follow the “five C’s” for underwriting loans: character, capacity, capital, collateral, and conditions.

“Typically financing a new startup or project with debt can be achieved so long as you demonstrate a viable source of repayment,” Schmidt said. “If you can convince them you’ll have no problems repaying the loan regardless of your employment, then you’ll have a higher chance of getting funding.”

The ways to get funding as an unemployed borrower can be contradictory. Schmidt said one of the ways to acquire funding is to be independently wealthy. He said that most business loan applications come from entrepreneurs who are self-employed by another company with a history of operation.

Jeanette Dugas, a certified public accountant in Florida, assists clients with the preparation of business plans which will be presented to banks when applying for a commercial loan. She agrees with Schmidt that, despite this ruling sounding counterintuitive, it is true that banks want to loan to someone with stable funding.

She said banks need to reach certain benchmarks in order to lend money responsibly. Although being unemployed is not a deal breaker, other factors can weigh heavily on the loan application. If a borrower is unemployed, receives no other source of income, and is expecting a large unsecured business loan, they are viewed as a highly risky venture for the bank.

“Cash flow is an important consideration to a banker so primarily a steady job represents a source from which the bank can be repaid,” Dugas said. “Aside from that, it could indicate a level of experience and success in a certain industry or line of business.” Schmidt said the next way to acquire funding is to demonstrate a viable idea. Borrowers need to present a well-developed business plan and provide adequate financial history for a lender’s review.

The third step for a borrower is to illustrate a logical plan for repayment. Banks are mainly focused on the risk factor, and being able to demonstrate you can make the monthly payment on the loan is paramount. If you can prove some form of steady income, as well as larger items of collateral to secure the loan, their chances of approval increase. Lenders may wish to see credit reports, bank statements, and your tax return as well.

The final method is to convince other wealthy individuals to guarantee the business loan because it will add credibility and strengthen the underwriting package.

“Banks look backwards at historical financial performance when determining a loan amount,” Schmidt said. “If you have a strong background, high net worth, high liquidity, and a viable project, then you’ll likely get a loan even though you’re technically not drawing a paycheck from a company.”

What about startups and new entrepreneurs?

But all businesses are not the same: startups and existing businesses are viewed differently by lenders.

Schmidt advises new entrepreneurs with bad credit or without a strong credit history or outside funding to avoid formal business loans. In his experience, startups business loans are the most risky compared to other types of loans.

“The odds of a new startup succeeding are low, so the odds are stacked against you,” he said. “Instead of taking on debt to finance a risky startup, you’re better off finding other sources of funding. By avoiding debt, you improve your resiliency and ability to stay in the game and keep swinging the bat rather than paying off loans.” Alex Genadinik, founder of marketing app website problemio.com, said that loans are a big topic on the apps. He agrees with Schmidt that business loans are usually out of the question for new entrepreneurs.

Alex Genadinik, founder of marketing app website problemio.com, said that loans are a big topic on the apps. He agrees with Schmidt that business loans are usually out of the question for new entrepreneurs.

“Neither banks nor private lenders will lend to them because the risk profile for a business which has not started is extremely high,” he said.

Genadinik said the failure of businesses in the idea-stage is around 99 percent because the entrepreneurs never follow through with their idea.

“To give money to that project is almost as good as just throwing it away,” he said. “A loan is like a gun with which an inexperienced person can shoot themselves in the foot. So too an inexperienced entrepreneur wastes a lot of money with poor decision-making and lack of savvy.” Genadinik said if an entrepreneur still needs a loan, they can take out a personal loan and use the funds for their business.

Beyond personal loans, another type of loan for denied applicants to consider are those offered by their local government. Some local governments, in an attempt at stimulating a certain part of the economy, offer funding for businesses. A city that wants to increase its arts community could offer business loans to a future art gallery owner or a dancing studio owner.

Seeking out an online lender is another option, particularly if you’re interested in unsecured loans, but be cautious about any online transaction and do your research to make sure the offer is legit. Avoid payday loans at all costs, as they come with an extremely high annual percentage rate. Though you’re virtually guaranteed loan approval, even with poor credit, your monthly payments with a payday lender will be exorbitant.

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How do unemployment benefits impact a loan?

For some unemployed entrepreneurs, receiving unemployment benefits can further complicate their plans to open a new business.

According to the SBA website, starting a business while accepting unemployment benefits falls in a gray area because of the concept of full-time versus part-time work.

State laws, which regulated unemployment benefit rules, focus on a person’s work schedule and not the work in particular. If a person is working full-time on a new business, some states have rules barring them from receiving benefits, even if they are receiving less income than at their previous job.

Some states have self-employment assistance programs that support new entrepreneurs during this time period. During 2020-2021, these assistance programs were predominantly featured in the Paycheck Protection Program, which helped self-employed workers who had lost their income due to the coronavirus pandemic.

Certain states fared better than others, with the top 10 states for Paycheck Protection Program assistance receiving billions of dollars in assistance, even for smaller states.

Entrepreneurs can use the self-employment assistance programs while on unemployment. This program allows unemployed future business owners to access financial aid equal to their unemployment insurance benefits. The aid, 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 business loan. It is part of the struggle of being a business owner. Although the process might be lengthy and risky, unemployed consumers with an imaginative and realistic plan for a business should reach out for funding and support in any possible way.