Unsecured Working Capital Loans: What are my Options?


Jacques Famy Jr
Review By Todd Millman
working capital loan

What is unsecured working capital?

An unsecured working capital loan is a type of financing that businesses obtain without offering any collateral as security to the lender. These loans provide immediate funds for companies to cover short-term operational costs, such as payroll, inventory, and other day-to-day expenses.

Due to the lack of collateral, they typically carry higher interest rates than secured loans and require a solid credit history and strong business performance for approval.

How does unsecured working capital loans work?

Unsecured working capital loans can include many different products such as business term loans, business line of credit, SBA loans, business cash advance and unsecured credit cards.

Each product has its own unique product features, rates, terms and conditions to consider when getting working capital financing for your business. Below we will review each product and its features under the 4 Best Working Capital loan Options.

4 Best Working Capital Loan Options for New Businesses

  1. Business Line of Credit- A business line of credit is a revolving credit facility that allows you to draw up and draw down on a line on demand up to a pre-specified credit limit. You only have to pay interest based on your outstanding balance so paying off early has its benefits!
  • Simple interest
  • Pull funds on demand
  • Only pay interest on balance 
  1. Short-Term Business Loans- A short-term business loan is a business term loan that provides a lump sum upfront with fixed rate and fixed term up to 18 months. It does not have a draw feature. 
  • Rates are Simple interest or a Factor Rate
  • Terms that range from 3 months to 18 months
  • Payments that are Monthly, Weekly or in some cases daily (M-F) 
  1. Merchant Cash Advance- A merchant cash advance is a purchase of future receivables by a funder in exchange for a lump sum of capital now. The purchase price is always greater than the lump sum advance. This difference is called the factor cost (factor rate) and is a fixed cost for the purchase.
  • No personal guarantee
  • This is a futures sales purchase and not a loan
  • Repayment is flexible and based on a set percentage of future sales
  1. Business Credit Cards- Credit cards are revolving lines of credit that are used for both purchases and making payments on expenses. Interest is charged based on the outstanding balance. A plastic card is issued for ease of use on demand.
  • Monthly payments
  • Only pay interest on balance
  • Convenient use of a card for purchases and expenses

The Most Common Reasons to get an Unsecured Working Capital Loan

Unsecured working capital loans are sought for a variety of pivotal business needs:

  1. Bridging Cash Flow Gaps: Many businesses experience cyclical or seasonal fluctuations in revenue. An unsecured working capital loan can provide the liquidity needed to maintain operations during quieter months or unexpected downturns.
  2. Inventory Financing: For companies that deal with tangible products, having a well-stocked inventory is crucial. These loans allow businesses to purchase necessary inventory upfront, ensuring they meet customer demand without depleting their cash reserves.
  3. Payroll Maintenance: Salaries and wages need to be consistent, even when business revenue isn't. Accessing unsecured funds ensures that employees are paid on time, fostering loyalty and morale.
  4. Marketing and Expansion Efforts: Growing a business often requires investment in marketing, outreach, or even physical expansion. An unsecured loan can offer the immediate capital required to seize these growth opportunities.
  5. Handling Unexpected Challenges or Opportunities: The business landscape is rife with unpredictability, from sudden equipment failures to unanticipated market openings. Having access to quick, collateral-free funds enables companies to adapt and thrive amidst changing circumstances.
unsecured capital loans

What are the Advantages and Disadvantages of Unsecured Working Capital Loans?

Advantages of Unsecured Working Capital Loan:

  1. No Collateral Required: Businesses don't need to pledge assets, safeguarding them from potential loss in case of loan default.
  2. Quick Approval and Disbursement: Without the need to evaluate collateral, the loan approval process is generally faster, ensuring businesses get funds when they need them.
  3. Flexibility: These loans often come with flexible terms, allowing businesses to choose repayment structures that match their cash flow patterns.
  4. Credit Building: Regular repayment can enhance a company's credit profile, potentially leading to better financial opportunities in the future.
  5. Minimal Documentation: In many cases, unsecured loans require less paperwork than their secured counterparts, simplifying the application process.
  6. Ability to Seize Opportunities: Quick access to funds means businesses can act on growth opportunities or manage unexpected challenges more effectively.
  7. Preserving Ownership: Unlike equity financing where shares are sold for capital, unsecured loans ensure business owners maintain full control of their company.
  8. Transparent Costs: Most unsecured working capital loans have clear terms with no hidden fees, allowing businesses to plan repayments with certainty.

Disadvantages of Unsecured Working Capital Loans:

  1. Elevated Interest Rates: Absence of collateral increases the lender's risk, often resulting in heftier interest charges compared to secured loans.
  2. Constricted Repayment Timeframes: These loans typically mandate quicker payback, potentially exerting added pressure on a company's monthly financial obligations.
  3. Rigorous Approval Standards: Without collateral as a safety net, lenders lean heavily on creditworthiness and business viability, making it tougher for some enterprises to qualify.
  4. Entanglement of Personal Finances: There's a chance that lenders will ask for personal guarantees, intertwining the owner's personal finances with the business's liabilities.
  5. Capped Borrowing Potential: The amount businesses can borrow is generally lower, which might not fully address the company's monetary requirements.
  6. Dense Repayment Schedules: Some structures demand frequent payments—often weekly or even daily—which can strain the company's regular cash flow.
  7. Costly Consequences for Defaults: Missing payments can result in substantial penalties, amplifying the financial burden.
  8. Credit Score Vulnerability: While prompt repayments can be beneficial, any lapses can tarnish the business's credit profile, jeopardizing future financing prospects.
  9. Inflexible Loan Terms: With preset conditions, there's scant wiggle room to modify the terms to cater to unique business scenarios.
  10. Overcommitment Risk: The relative ease in obtaining these loans might lure businesses into overextending themselves, leading to challenging debt situations.
loan application

How to apply for Unsecured Working Capital Loans

  1. Qualifications – Determine your qualifications for products by talking to a business funding advisor about credit, documentation and financial credit worthiness.
  2. Application- Apply by providing an application that has both person al and business information. As part of the pre-approval process you will need to provide documentation such business bank statements and in some cases other financial documents to secure an offer.
  3. Offer(s)- Receive offers from lender(s) and compare product features, rates, terms and conditions to fund. Always shop and compare offers before making decisions. 
  4. Selection- When and if you make a selection, you will need to sign an agreement and provide closing documentation to receive final approval.
  5. Final Underwriting- Once signed agreement and closing conditions are provided to the lender/funder the underwriter will perform quality control verifications and clear conditions to fund.

Funding- When a clear-to-fund is issued by the lender/funder, repayment process is set up and funds are sent to your business bank account via a wire or ACH.


Frequently Asked Questions

Are Unsecured Working Capital Loans a Good Idea?

Having a credit facility is a great idea as working capital is needed at some point or another for most businesses. Always look at the need for working capital and compare that against the cost of a working capital loan when making decisions.

How much money can I receive through an unsecured Working Capital Loan?

Working capital loans considers the revenue of the business, credit, cash flow management, industry, time in business and other factors to determine the amount you will receive. A rule of thumb is up to 100% of your monthly revenue deposits currently as a guide if it’s a working capital loan repaid within a year.  

Working Capital Loan vs Line of Credit: Which One Is Better?

A loan is a fixed lump sum provided upfront with a fixed term to repay with a fixed payment. A line of credit is a revolving line that offers flexibility in draws of money up to a credit limit. Each has Pro’s and Con’s and should be evaluated against the need for working capital and how the money would be used best.

What documents are needed for an unsecured working capital loan?

Most unsecured working capital loans will require an application and at least 2 3 months most recent business bank statements. For larger amounts a business tax return may be requested. Documentation will depend on the product you are applying for and conditions to fund.

Can I get an unsecured working capital loan with Bad Credit? 

Bad credit can be an obstacle, but not necessarily an impediment to getting working capital for your business. Bad credit will limit what type of working capital loans you will be approved for and impact both rate and terms.

The Bottom Line about Unsecured Working Capital Loans

As will all business financing options, you should always consider the cost verses the benefit of acquiring unsecured working capital loans for your business. The need is always the most important driver of the decision. 

Working capital is essential to the operation of most businesses and having a credit facility in place for your business can be a life saver and allow the business to take advantage of opportunities or help the business operate smoothly.

Jacques Famy Jr

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