Unsecured Business Loans: Best Options to Fund Your Small Business

Differences Between Unsecured Business Loans and Secured Business Loans

A secured business loan usually requires personal and business assets (collateral) to guarantee and secure the interest of the business loan. Notably, if you fail to repay the loan, your personal savings and other assets could be seized by the lender for compensation. This collateral may include real estate, equipment, liquid assets, and other business or personal assets. The presence of such collateral allows business lenders to take greater risks, offering you lower APRs and other perks of borrowing.

On the other hand, Unsecured business loans do not require personal collateral. However, they may still require business assets as collateral and a business performance guarantee, exposing lenders to a higher risk. Consequently, unsecured loans often come with higher APRs and prepayment penalties. Always verify these and other details about your savings, prepayment penalties, and APRs in your loan agreement when you consider business financing.

Pros and Cons of Unsecured Business Loans

No matter what business funding product you will choose there are always advantages and disadvantages to consider and unsecured business loans are no exception.

Pro's of Unsecured Business Loans

• Collateral - Obviously you need to state the obvious that unsecured business loans do not require collateral for business funding. Companies provide unsecured financial models to facilitate hassle-free business funding.
• Reduces risking collateral - Since collateral is not pledged, there is no risk of losing personal collateral if a default were to occur. It's like getting a discount on the risk factors associated with traditional loans.
• Application process is faster- Unsecured business loans have a faster application process and turnaround time to funding. OnDeck, for example, expedites this process further with its data-driven methodologies.
• Builds business credit- Unsecured business loans, equipped with features like early payoff discounts, still build business credit like secured business loans. This makes them an apt choice for businesses looking to boost their creditworthiness.

Con's of Unsecured Business Loans

• Higher interest rates and fees - To compensate for the additional risk of an unsecured business loan, lenders will charge higher rates and fees associated with the unsecured business financing options. These fees include items such as the origination fee, late charges, and business loan prepayment penalties. Moreover, lenders undertake the responsibility of collecting payments on your behalf, reviewing required documentation, and deducting their respective fees before forwarding you the balance.
• Credit limit restrictions - Unsecured loans, due to their higher lending risk, can often offer less financial support compared to their secured counterparts.
• Credit qualifications - While credit requirements can sometimes be steeper in the absence of collateral, not all lenders adopt this perspective. Some opt to compensate with augmented rates and fees. Evaluating your personal and business documentation, underwriting guidelines, and your bank's processing time are the key factors that govern a lender's decision.
• Adds debt to business- Just like other business finance products, using unsecured business funding could end up amplifying overall debt and pushing up monthly expenses in light of repayment obligations. Always remember to evaluate all factors and outcomes before adding more debt to your business.

Make sure you review your business loan agreement diligently to comprehend extra fees and repayment terms. Also, consider payment options offered by lenders, like automatic repayments through ACH or debit transactions, that might be more convenient and incur fewer expenses.

5 Different Types of Unsecured Business Loans

Securing financing is a critical challenge for small business owners, especially those who need more collateral to obtain secured loans. Unsecured business loans are an excellent alternative for businesses seeking financing without having to pledge assets as collateral. Different unsecured business loans are available, each with unique features and benefits.

1. 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 with marginal credit, lack sufficient financial statements, and other factors limiting 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 are basedon factor cost simple interest
• Credit Score: All credit types accepted. No minimum credit score
• Processing time: Same Day to 24 hours

Pros

• Fast, same business day funding
• Low annual revenue requirement
• Higher approval rates than traditional small business loans
• Lower credit standards than traditional unsecured loans
• Simple 1-page loan application
• Minimum annual revenue required

Con's

• Higher rates than traditional secured business loans
• Weekly or, in some cases, M-F payments
• Personal guarantee may be required.

2. 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 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 lines 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

Pros and Cons

• Revolving line of credit
• Fast, same business day funding
• Low annual revenue requirement
• Higher approval rates than traditional unsecured loans

Con's

• High personal credit score not required but recommended
• Higher rates than traditional small business loans
• Monthly payments or weekly payments may be available

3. Merchant Cash Advances (Business Cash Advances)

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

A merchant cash advance is not an unsecured business loan. Still, an advance is suitable for business owners with 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 are base on factor cost simple interest
• Credit score: All credit types accepted. Bad credit is considered. Low minimum credit score.
• Processing time: Same Day to 24 hours

Pros

• Fast, same business day funding
• No personal guarantee
• Low minimum annual revenue requirement
• Higher approval rates than a traditional business loan
• Low minimum credit score standards than traditional unsecured small business loans. Business credit scores are not required.

Con's

• Merchant cash advances have higher costs than traditional business loans
• Flexible payment options: Weekly, Daily payments, or a fixed percentage
• Offered by alternative lenders and not Banks or Traditional Lenders

4. Invoice Factoring

Invoice financing is available to specific small businesses that invoice clients continuously monthly and want to get an advance on those invoices. This product suits business owners with marginal credit, lack of sufficient financial statements, and other factors limiting the business from getting traditional unsecured business loans. Invoice factoring is not an unsecured business loan 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 is charged for each invoice advanced
• The credit of a business owner is not a factor. Bad credit is 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 invoice advances.

Pros

• Fast business funding
• Low costs and fees
• Business Owner credit is not a factor

Con's

• Weekly, Daily payments or a fixed percentage
• Personal guarantee required

5. 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 based on principal interest rates. This product is suitable for business owners with good to an excellent credit score but lack sufficient financial statements and other factors limiting 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 are 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

Pros

• Fast business funding
• Principal and interest rates starting at 9%
• Business Owner credit needs to be good to excellent
• Monthly flexible payments

Con's

• High interest Rates
• Only offered by traditional lenders and not alternative lenders
• Credit lines can be reduced anytime at the discretion of the bank

How Can My Business Use an Unsecured Loan?

So, what are the advantages of unsecured business loan? From an editorial perspective?

Unsecured business loans often do not necessitate collateral, making them viable for businesses without substantial assets. There is also less risk involved; in an unfortunate event of default, the fear of repossession does not intimidate the business. Plus, the application process for these kind of loans is commonly quicker. Referencing the Bank Rate Monitor, these are some of the situations where an unsecured business loan can come in handy:

• Working capital for cash flow: Businesses might require an extra influx of working capital to cover daily cash flow necessities such as payroll, accounts receivable delays, purchases, and business expansion. Working capital ensures the smooth operation of cash flows and eliminates the possibilities of overdrafts, Non-Sufficient Funds (NSFs), and low balances in the operating bank account.
• Business Expansion: When it's time to actualize a new business idea or initiative, sufficient capital is required. As the award-winning editorial content on Blueprint suggests, without the necessary capital, that fresh idea often can't manifest.
• Emergency expenses: A business might encounter unexpected issues that quickly demand funds. It could be crucial equipment malfunctioning, an account failing to pay an invoice, or an abrupt major loss in business.
• Equipment: Essential equipment can be the lifeblood for certain businesses. Managing the costs of such equipment can lead to a cash flow problem if used from the business' own capital, thus unsecured business loans offer a solution.

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.

Business Owner’s credit allows lenders to leverage that instead of personal collateral 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 the 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.

Applying for Unsecured Business Loans

Evaluating Your Business's Credit Status

Before applying for any form of credit, it's fundamental to evaluate your business's credit status. Lenders typically review your personal and business credit when considering your loan application. Recognized credit monitoring portals like AnnualCreditReport.com and Experian allow you to check your credit reports for free.

Moreover, third-party services like Dun & Bradstreet along with renowned credit bureaus such as Experian and Equifax offer your business credit report and aid in monitoring and improving your credit score. Identify any errors in your credit reports and dispute them with the relevant credit bureau for free to potentially enhance your credit score. Stay on top of your business's credit status and plan to finance your business effectively.

Comparing Lenders and Choosing the Best Loan Option

• After evaluating your credit status, it is equally crucial to shop around and compare your options across as many lenders as possible. This comparative analysis will aid you in discovering the best business loan suitable for your situation.
• It is prudent to consider the loan amounts and repayment terms offered by each lender. Take into account the loan amount that meets your business needs and a repayment term that comfortably fits within your cash flow framework.
• Look for reviews and testimonials from other borrowers to gauge the reputation of the lender. Consider aspects such as customer satisfaction, responsiveness, and overall customer experiences. Some lenders may propose additional features like repayment flexibility, access to credit lines, or the entitlement to borrow multiple times. You should consider these features when comparing lenders.
• An essential criterion to calculate total loan cost is the interest rates, alongside other factors such as repayment terms, fees, and eligibility requirements. Many lenders allow you to pre-qualify with only a soft credit check, which won't affect your credit score. It's valuable to examine reviews from other borrowers to comprehend their experiences with the lenders you're considering.

Finally, choose the lender who provides the best overall offer and customer experience. Ensure to compare the interest rates and any additional fees imposed by different lenders. Remember to factor in the total cost of the loan, including any origination fees and other charges. After completing your research, choose the lender you like best.

Criteria for Eligibility and Loan Application Process

Key Eligibility Requirements for Unsecured Business Loans

Unsecured business loans demand some fundamental prerequisites to ensure your eligibility for a loan approval:

• Business age: Your business should have been operational for at least six months to two years.
• Revenue: Your company must bring in considerable revenue to ensure the repayment of the new loan.
• Industry: Certain high-risk industries may not be eligible for unsecured loans from specific lenders. This also extends to specific industries that some lenders may choose not to serve.
• Credit score: Lenders usually scrutinize both your business and personal credit scores. A minimum personal credit score of 600 or 650 is the norm for approval.
• Current debts: If your current debts largely consume your revenue, lenders may not approve the new loan due to the risk of struggle to repay it. However, exceptions can be made giving the historical performance and the business owner's ability to manage debt. Need to explain or elaborate on debts well.

When applying for your loan, ensure to review all eligibility criteria properly to avoid wasting time and resources. Most lenders require at least two years in business, and startups can expect strict examination of their creditworthiness and projected annual revenue.

Essential Documents Needed to Apply for an Unsecured Business Loan

For certain lenders, you're mandated to provide the bare minimum - a valid form of identification, your business bank account, and routing number, along with the past three months of your business bank statements.

Documents necessary during underwriting vary among lenders, but a few common documents to have ready when applying include:

• Business licenses
• Articles of incorporation
• Personal and business bank statements
• Personal and business tax returns
• Balance sheets
• Financial Statements
• Profit and loss statements
• Business plan
• Building lease

For a meticulous overview of your business's stability and financial capacity, lenders often request additional documentation demonstrating your capacity to repay the loan.

It's advisable to prepare all your documents and speak to a bookkeeper or accountant well ahead of time. For specific requirements, do not hesitate to contact your lender directly. They can guide you through their specific application process and necessary documents, helping you secure your unsecured loan.

Uncollateralized/Unsecured Loans for Every Need

Best Unsecured Loans for Quick Fund Availability

The best unsecured loans offer quick funds to meet your immediate business needs. Ranging anywhere between $10,000 to $150,000, you can use these funds for any business needs - from managing ongoing operations to business expansion, from startup financing to equipment purchase.

Consider short-term unsecured business loans if you're hunting for the fastest funding option with minimal documentation. The key benefits of short-term unsecured loans include;

• High approval rates for all types of industries
• Absence of collateral requirements
• Competitive interest rates offered by various lenders
• Attractive early payoff incentives.

Alternatives to Unsecured Business Loans

Diving into Crowdfunding

When pondering over alternatives to unsecured business loans, crowdfunding springs up as a strong contender. Crowdfunding websites like Kickstarter, GoFundMe, or Indiegogo allow businesses to raise funds from a large pool of people online.

• They enable businesses to create a profile, publish their funding goal, and gradually accumulate funds from the public. In return, businesses can offer rewards such as free products, special discounts, or equity in the company. It's an ideal choice for businesses with strong online representation and product-centric business models.
• Crowdfunding also obviates the need to repay a loan and the risks associated. However, reaching the funding goal is crucial in most crowdfunding platforms for you to receive the funds. If your goal is not met, you receive nothing.

Thus, if you have a strong online presence, a compelling business story, and a marketable product or service, it might be worth exploring the crowdfunding route. Provide value to your investors and capitalize on this method to secure funds for your business. Remember, a successful crowdfunding campaign does not only involve great rewards, but also comprehensive planning and consistent engagement with your potential funders.

Understanding the Role of Personal Guarantees

Even though unsecured business loans do not require collateral, many lenders will ask for a personal guarantee. This agreement from you, as the borrower, ensures the repayment of the loan from your personal assets if your business defaults.

For instance, with a personal guarantee in place, a lender could collect from your personal bank account, garnish your wages, or seize other assets if your business fails to repay the loan. Personal guarantees are simply statements that you've provided correct information in your application, and you commit to repaying the loan as per the terms detailed in the agreement.

Different types of personal guarantees exist, so it is crucial to read and understand what your liability may be in the event of default.

As reported by the U.S. Small Business Administration, always consult a lawyer or financial advisor before signing a personal guarantee. It is a serious commitment that, if not appropriately understood, could lead to severe financial consequences. Make informed decisions and plan for the future of your business judiciously.

As a responsible business owner, avoid borrowing more than what you can repay. Keep in mind that every business decision impacts your business's future, and a step taken in the present might hold vital significance in the days to follow.

Frequently Asked Questions

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. They're often a solid option when assessing your business financing needs, especially if your company lacks physical collateral or needs capital fast. As a business owner, you'll generally see better rates and terms if you offer both personal and business guarantees, full stop. But, maintaining the integrity of your assets by opting for an unsecured loan can still be a viable option.

To determine the most suitable unsecured business loans, base your decision on the use of money, the risk involved in the financing of your business, and the terms, rates, and fees associated with that risk. It might be beneficial to opt for secured business financing if you desire the best rates and terms, or it might not. Accessibility of funds also plays a crucial role in this decision-making process. Ultimately, it's your responsibility as a business owner to decide what the best unsecured business loan option is for you but be sure to weigh the pros and cons of both loan options diligently before making a decision.