Securing capital as a small business has always been difficult. However, traditional lending streams are becoming increasingly difficult to access, leaving many small business owners in a double bind.
As an entrepreneur, you need capital to grow your venture. However, you may find you are being turned down by the bank for a small business loan because you don’t have enough collateral.
Thankfully, there are other options for small businesses that don’t involve borrowing money from a friend or family member. Applying for unsecured business loans is one alternative path taken by small business owners throughout the U.S. This option presents many advantages for those without assets to secure a loan.
“Everyone has their own reasons for starting their own business. But don’t choose other people’s reasons; choose your own.” – Simon Dlugowski, Founder of MySocialNerd.com
Secured and Unsecured Loans: What’s the Difference?
Secured and unsecured loans are the two main types of lending streams for small businesses. However, there are fundamental differences between the two.
Deciding whether to take out a secured or unsecured loan could have long-lasting implications for your business. Therefore, it’s important to understand the benefits and potential downsides of each before you begin the application process.
A secured loan uses property owned by the borrower as security against the loan amount. This lending option is traditionally available from banks and is also known as “asset-backed lending.”
Similar to re-mortgaging a house to raise capital, you are essentially putting your property on the line to fund your business. It means if you take out secured small business loans, you could lose your asset if you fail to keep up with repayments.
An unsecured business loan doesn’t require property to secure the loan amount. Unsecured loans are great for small business owners with a good personal credit history, and the application process is fast and straightforward.
What are the Benefits of an Unsecured Loan?
Unsecured loans come with many benefits for small business owners. Although they tend to offer smaller amounts, they are generally considered low-risk and hassle-free.
- There is no collateral required
If you don’t possess some form of collateral – such as a property or vehicle – you may struggle to get a small business loan from a bank or private lender. This is because most traditional lenders require borrowers to take out loans against their existing assets. This collateral provides the lender with a “guarantee” if the borrower defaults on repayments.
With an unsecured loan, there is no need for collateral, which is good news for businesses with none to offer. Instead, creditors will assess you on your personal credit score and business plan. In some instances, you may be required to have a guarantor.
While traditional loans require lengthy paperwork and a complex application process, unsecured loans can be a convenient option for small businesses. The main difference is that lenders tend to provide smaller loans to cover an immediate expense. Examples might include funding for new equipment, staff wages or inventory costs.
Unsecured loans give small businesses the opportunity to access funds without putting their personal assets on the line. Small business owners can also borrow smaller amounts (typically anywhere from $3,000 – $50,000 – or up to 75% of your monthly turnover) without the stringent application process applied to traditional loans.
If you are just starting out in business and your credit is less than perfect, you may find you are only entitled to borrow a small amount. However, as your business grows and expands, so will your creditworthiness. It allows you to borrow flexibly while ensuring you never get given more than you can pay back.
What are the Benefits of a Secured Loan?
While unsecured loans are a smart choice for many small business owners, those with poor personal credit may struggle to obtain one. In this instance, a secured loan might be your best option. The benefits of a secured loan are as follows:
- Secured loans provide larger loan amounts
- They have longer repayment periods
- There are lower repayment rates
- You can apply for a secured loan even if you have poor credit
The downside is that with a secured loan, you often have to make an upfront payment just like you do with a mortgage. You also risk losing your assets if you cannot pay your loan back, which is enough to deter any small business owners.
How to Apply for an Unsecured Loan
You can apply for an unsecured loan online through an organization like the SBA (Small Business Administration). SBA loans are backed by the government, so you don’t need to put up collateral to secure the loan. However, loans from the SBA aren’t for everyone.
If you’re a start-up business, you must have at least two years in business to qualify for an SBA loan. You must also have a good personal credit history and be based in the U.S. in an eligible industry. If you don’t match up to the SBA’s criteria, you may be able to source an unsecured loan from another online lender. Just be sure to check the credentials of your lending stream before you share details of your business.
If you get rejected for an unsecured loan, there are plenty of other lending streams you can try, including non-profit small business grants, private lenders, angel investors, business loans for women and peer-to-peer lending services.
Raising capital as a small business can be a challenge. However, unsecured loans present a safe, flexible and convenient solution for first-time entrepreneurs. Today, there are more funding options than ever for small businesses. However, before you settle on the way to finance your business growth, you should research your options carefully and be aware of the risks and restrictions they present.
While there are benefits to both secured loans and unsecured loans, if you don’t have collateral and you only need to borrow a small amount, an unsecured loan is a smart choice that doesn’t pose a threat to your personal assets.