What is an Unsecured Business Loan?

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An unsecured business loan is small business funding that requires no personal collateral but is based on the creditworthiness of the small business owner and cash flows. Unsecured business loans work by requiring business collateral and also a personal or business performance guarantee depending on the business lender/funder. A business guarantee is collateralizing general business assets of the business as well as a promise for the business to pay the debt back which is considered unsecured business loan because no personal assets like personal property or personal valuable assets are involved to secure funding. In some cases funding requires the owner to be personally responsible. Often times the best unsecured business loans are offered by alternative lenders as apposed to traditional lenders.

What Are the Differences Between Unsecured Business Loans and Secured Business Loans?

A secured business loan usually requires both personal and business assets (collateral) to guarantee and secure the interest of the business loan. That collateral may include real estate, equipment, liquid assets, and any other business or personal assets. Business and/or personal collateral allow business lenders to take greater risks and increase the possibility of lending to a business. Unsecured business loans do not require personal collateral but may require business assets as collateral and a business performance guarantee, and therefore have a higher risk to the business lender. Check your loan agreement for details when it comes to business financing.

The 5 Different Types of Unsecured Business Loans: Compare Small Business Loans

Short-Term Unsecured Business Loans

Short term business loans are term loans that are from 6 to 18 months in duration. An unsecured business loan, like a short term business loan, is suitable for business owners who have marginal credit, lack sufficient financial statements, and other factors that limit the business from getting traditional secured business loans.

Terms

  • Term Loans from $10,000 up to $500,000
  • 6 to 18 months in duration
  • Rates base on factor cost simple interest
  • Credit Score: All credit types accepted. No minimum credit score
  • Processing time: Same Day to 24 hours

Pro’s and Con’s

  • Fast, same business day funding
  • Low annual revenue requirement
  • Higher approval rates than traditional small business loans
  • Lower credit standards than traditional unsecured loans
  • Higher rates than traditional secured business loans
  • Weekly or in some cases M-F payments
  • Personal guarantee may be required.
  • Simple 1-page loan application
  • Minimum annual revenue required

Business Line of Credit

Business lines of credit are similar to credit cards in that it is revolving credit. You are approved for a credit limit and can draw as little or as much as you want up to the credit limit and pay back a minimum monthly payment or pay off more at any time. Business lines of Credit are great for quick purchases and payments. Some business lines of credit are secured, and some are considered an unsecured business line of credit, so make sure you ask your lender if the business line of credit is secured or not and what it is secured with.

Terms

  • Loan Amounts from $10,000 up to $100,000
  • Annual renewals
  • Rates based on principal and interest starting at prime or treasury index plus 1%
  • Credit score: Good to excellent credit history with above 600 credit score required
  • Processing time: Same Day up to a week

Pro’s and Con’s

  • Revolving line of credit
  • Fast, same business day funding
  • Low annual revenue requirement
  • Higher approval rates than traditional unsecured loans
  • High personal credit score not required, but recommended
  • Higher rates than traditional small business loans
  • Monthly payments or weekly payments may be available

Merchant Cash Advances (Business Cash Advance)

A Merchant Cash Advance, also known as Purchase and Sale of Future Receivables, allows you to leverage your future cash flow in the form of an advance. You receive a lump sum of money upfront and promise to pay back a greater amount over time by promising a set percentage of future sales deposits. It is paid back with a fixed daily or weekly payment or a percentage of future credit card sales depending on the business.

A merchant cash advance is not an unsecured business loan, but an advance, and is suitable for business owners who have marginal to poor credit, lack sufficient financial statements, and other factors that limit the business from getting traditional financing.

Terms

  • Loan Amounts from $10,000 up to $5,000,000
  • 6 to 18 months in duration
  • Rates base on factor cost simple interest
  • Credit score: All credit types accepted. Bad credit considered. Low minimum credit score.
  • Processing time: Same Day to 24 hours

Pro’s and Con’s

  • Fast, same business day funding
  • No personal guarantee
  • Low minimum annual revenue requirement
  • Higher approval rates than traditional business loan
  • Low minimum credit score standards than traditional unsecured small business loans. Business credit scores not required.
  • Merchant cash advances have higher costs than traditional business loans
  • Flexible payment options: Weekly, Daily payments or a fixed percentage
  • Offered by alternative lenders

Invoice Factoring

Invoice financing is available to specific small businesses that invoice clients continuously month over month and want to get an advance on those invoices. This product is suitable for business owners who have marginal credit, lack sufficient financial statements, and other factors that limit the business from getting traditional unsecured business loans. Invoice factoring are not an unsecured business loans, but an advance on specific invoices.

Terms

  • Invoices are advanced on-demand and paid back by the client you invoiced
  • Typically 1 to 2.5% simple interest charged for each invoice advanced
  • Credit of business owner is not a factor. Bad credit accepted as there is no minimum credit score requirement.
  • Processing time to get approved initially 1 to 2 weeks: Same Day was approved for any future advances on invoices.

Pros and Cons

  • Fast business funding
  • Low costs and fees
  • Business Owner credit is not a factor
  • Weekly, Daily payments or a fixed percentage
  • Personal guarantee required

Business Credit Cards

Business Credit Cards are very similar to personal credit cards, in that they are revolving lines of credit in which a card is issued for immediate purchases and payments. Payments are flexible with minimum monthly payment options and are based on principal interest rates. This product is suitable for business owners who have good to excellent credit score but lack sufficient financial statements and other factors that limit the business from getting traditional financing. Business credit cards are not considered unsecured business loans, but are unsecured revolving lines of credit.

Terms

  • Credit limits from $1,000 up to $75,000
  • Revolving credit that has no term limit
  • Rates base on principal and interest and typically 9% up to 29.99%
  • Credit Score: Fico scores above 660
  • Processing time: Same Day to 24 hours

Pro’s and Con’s

  • Fast business funding
  • Principal and interest rates starting at 9%
  • Business Owner credit needs to be good to excellent
  • Monthly flexible payments
  • Only offered by traditional lenders and not alternative lenders

How Can My Business Use an Unsecured Loan?

  • Working capital for cash flow-Every business at times needs that infusion of capital to help the level of daily cash flow requirements such as payroll, accounts receivable delays, purchases, and business expansion. Business working capital provides smooth cash flows and eliminates potential overdrafts, NSF’s, and low daily balances in the business operating bank account.
  • Business Expansion-When growing a new business idea or initiative, business capital is needed to execute on the plan. Without the necessary capital many times, that new idea can’t happen.
  • Emergency expenses-You never know in business when a major issue can impact your business, and you need money fast such as major equipment going down, an account that doesn’t pay an invoice, or a sudden major loss in business.
  • Equipment-For certain businesses, the equipment can be the lifeblood of the operation. Much of that equipment can be pricey, and using the business capital may not be enough or cause a real cash flow problem. That’s where unsecured business loans can help.

The Need for Uncollateralized/Unsecured Loans

Overwhelmingly, small businesses need to rely on their credit to receive funds for their business. The Small Business Credit Survey compiled by the Federal Reserve for 2019 noted that 86% of employer businesses relied on their own credit scores.

Source: Small Business Credit Survey – Federal Reserve Bank

Business Owner’s credit allows lenders to leverage that instead of personal collateral to be able to offer financing options such as unsecured business funding options that are not collateral loans. It’s clear that the need for unsecured business funding exists.

Why Do Unsecured Business Loans Have Higher Interest Rates Than Secured Loans?

An unsecured business loan takes on greater risk because they don’t have the same collateral to rely on to offset loan delinquency and default that secured loans have. Secured business lenders have the ability to seize any secured assets to mitigate losses from small business loan defaults. Unsecured business lending, therefore, has higher risks because they do not have secured assets like collateral loans and have to pass those credit losses by imposing higher interest rates and fees.

Frequently Asked Questions

Is it possible to get a business loan without collateral? What are my loan options?

An unsecured business loan does not require personal collateral, but may require business collateral.

Which banks offer the best unsecured business loans?

Most banks, credit unions, and a financial institution or traditional lender that has depositors, will not offer unsecured business loans due to the fact they are higher risk and banks have to have lower default rates and higher lender approval standards to protect there depositors. Most lenders will require collateral to offset the risk. There are some non-depositor financial institutions like online lenders and banks that do provide unsecured business loans like Celtic Bank and Web bank to name a few.

Are unsecured business loans safe?

Unsecured Business loans are a safe business financing option but may come with higher rates and less favorable terms than a secured loan due to the greater risk that lenders have to deal with without the security of personal collateral of an unsecured loan. Always compare loan options and decide what is best for you and your business.

Is a Small Business Administration Loan an unsecured business loan option?

The Small Business Administration does not provide unsecured business loans and will require collateral.

The Bottom Line About Unsecured Business Loans

Unsecured business loans have their benefits as you are not putting up your personal assets for collateral and placing them at risk, but keep in mind that there is a price and or cost for that choice to avoid secured business finance. As a business owner, you will always get better rates and terms if you put up both personal and business guarantees, full stop. But that doesn’t mean an unsecured loan is not a great option.

Your choice of the best unsecured business loans should be based on the use of money, the risk involved in the financing of your business and terms, rates, and fees associated with that risk. It may be worth getting secured business financing if you are in search of the best rates and terms, or it may not. Ultimately it will be your decision as a business owner with what best unsecured business loan option you choose, but make sure you weigh the pros and cons of both loan options before making a decision.

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