Business Expansion

What is an Unsecured Business Loan?

Last updated on March 10, 2020

Jacques Famy Jr

An unsecured business loan is a business loan that requires no personal collateral but is rather based on the creditworthiness of the small business owner based on credit and cash flows. Unsecured business loans may require 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.

What Are the Differences Between Unsecured 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.

The 5 Different Types of Unsecured Business Loans

Short-Term Business Loans

Short term business loans are loans that are from 6 to 18 months in duration. 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 financing.

Terms

  • Loan Amounts from $10,000 up to $500,000
  • 6 to 18 months in duration
  • Rates base on factor cost simple interest
  • Personal Credit: All credit types accepted
  • Processing time: Same Day to 24 hours

Pro’s and Con’s

  • Fast business funding
  • Higher approval rates than traditional business loans
  • Lower credit standards than traditional business loans
  • Higher rates than traditional business loans
  • Weekly or in some cases M-F payments

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, 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%
  • Personal Credit: Good to excellent above 600 FICO required
  • Processing time: Same Day up to a week

Pro’s and Con’s

  • Fast business funding
  • Higher approval rates than traditional business loans
  • Lower credit standards than traditional business loans
  • Higher rates than traditional business loans
  • Monthly or Weekly payments

Merchant Cash Advance (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…

This product 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 $500,000
  • 6 to 18 months in duration
  • Rates base on factor cost simple interest
  • Personal Credit: All credit types accepted
  • Processing time: Same Day to 24 hours

Pro’s and Con’s

  • Fast business funding
  • Higher approval rates than traditional business loans
  • Lower credit standards than traditional business loans
  • Higher rates than traditional business loans
  • Weekly, Daily payments or a fixed percentage

Invoice Financing

Invoice financing is available to specific 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 financing. This is not a business loan.

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
  • Personal Credit of business owner is not a factor
  • 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 personal credit is not a factor
  • Weekly, Daily payments or a fixed percentage

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 well to excellent credit but lack sufficient financial statements and other factors that limit the business from getting traditional financing.

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%
  • Personal Credit: 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 personal credit needs to be good to excellent
  • Monthly flexible payments

How Can My Business Use an Unsecured Business 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 Business Loans

Overwhelmingly, business owners need to rely on their personal 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 personal credit scores.

Source: Small Business Credit Survey – Federal Reserve Bank

Business Owner’s personal credit allows lenders to leverage that instead of personal collateral to be able to offer unsecured business funding options. It’s clear that the need for unsecured business funding exists.

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

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

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.

Your choice of 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, it may not. Ultimately it will be your decision as a business owner with what option you choose, but make sure you weigh the pros and cons of both options before making a decision.

 

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* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.