unsecured business loans

DISCLAIMER: This article was written in 2022 and has not been updated. For more up to date information about small business funding products and options, please browse our recent articles.

Are you looking for small business financing that doesn’t require you to put up business-owned assets as collateral? An unsecured loan could be the ideal solution for you. While you may end up paying more for unsecured loans than secured funding, it could get you the money you need to get through an emergency or take advantage of an immediate opportunity, even if you don’t have collateral to back the funding. 

In this article, I’ll explain what you need to know to determine whether an unsecured business loan is the right solution for you and figure out which type of funding is ideal for your situation.

What are unsecured business loans?

Unsecured business loans are a form of financing that doesn’t require you to put up personal or business collateral, such as business equipment, inventory, a vehicle, or real estate, to get approved for funding. (Collateral can be anything of value that may be quickly sold and turned into cash.) Secured business loans, by contrast, require that you pledge assets that your lender can take and sell if you fail to make loan payments as contractually obligated by your lending company. 

Be aware that even though physical collateral is not required with unsecured financing, it doesn’t mean you won’t be held liable if you can’t repay it. Your lender can sue you if you default on financing. Another form of recourse lenders have if you fail to pay back a loan is a Uniform Commercial Code (UCC) lien. A UCC lien gives a lender the right to seize business assets if you fail to repay your loan. Lenders can file a UCC lien with your state’s secretary of state’s office after you sign your loan agreement. Your lender may file a lien on specific assets or a blanket lien, which lets them take any business assets necessary to recoup losses.

How do unsecured business loans work?

Unsecured business loans function like other types of financing. You apply for them, typically submitting a business plan, bank statements, tax returns, and other documents to prospective business lenders to determine your creditworthiness. (The loan application process will vary depending on the loan type and lender. The application and underwriting processes are more rigorous with traditional banks than online lenders.) Prospective lenders check your personal credit score, business credit history, annual company revenue, and other factors related to your personal and business finances. If approved, you get a lump sum of money or an amount you can borrow against. Finally, you make monthly payments to pay back what you’ve borrowed.

You will typically receive financing from unsecured business loans faster than from secured loans. That’s because the lender doesn’t have to check the value of your collateral. Because they’re not backed by collateral, they’re riskier for lenders. That’s why unsecured loans usually come with higher interest rates, less favorable repayment terms, and require a personal guarantee.

Pros and cons of unsecured business loans

Pros: Unsecured small business funding is attractive because:

  • Applications can usually be processed quickly.
  • Funding is also relatively fast.
  • You can get financing even if your business doesn’t have valuable physical assets to put up as collateral, which is often the case for startups and other new businesses.

Cons: The negatives of unsecured business loans include:

  • They usually come with higher annual percentage rates (APRs) than loans backed by collateral.
  • You may have to get funding from less reputable providers than traditional financial institutions.
  • You’ll likely have to provide a personal guarantee, which puts your assets at risk, or a business lien, which allows a lender to seize whatever of value your business has.

How to get unsecured business financing

You may be able to get an unsecured business loan from both traditional financial institutions (less likely), like banks and credit unions, and online and alternative lenders (more likely).

To qualify for an unsecured loan from a bank, you’ll likely be required to be in business for several years, have solid personal credit, excellent annual business revenue, and good cash flow. In comparison, online lenders may have more flexible qualifications and can be faster to fund.

Government-backed Small Business Administration loans (SBA loans), like the popular SBA (7)a loan program offered through banks and other lenders approved by the SBA, may not need collateral if they’re less than $25,000. Larger loan amounts typically require collateral. Most SBA financing requires an unlimited personal guarantee from anyone who owns more than 20 percent of a company.

Unsecured business loan options

Here are some of the most popular types of unsecured loans and what they can be used for:

  • Business credit cards. A bank or credit card provider issues an approved credit limit not backed by collateral. Interest rates on business credit cards can be relatively high. They’re ideal for paying everyday business expenses to separate them from personal ones, which is particularly valuable at tax time. Make it a point to pay off your business cards quickly so interest doesn’t add up.
  • Signature loans. If you have a good relationship with your local bank or credit union, you may be able to get approved for this type of business loan, which is an unsecured, no-collateral loan. It’s based on a good faith assessment of the borrower’s creditworthiness and their promise to repay the money. These types of term loans can be used for almost any purpose but are typically for relatively small amounts
  • Short-term loans. Some short-term loans don’t require collateral. Traditional lenders typically do, while online lenders may not. Similar to signature loans, funds can be used as working capital, to improve business cash flow, and for other purposes but usually are only approved for relatively small amounts, typically less than $25,000. Unsecured short-term loans usually come with higher interest rates and shorter loan terms than secured ones. Putting up collateral will get you lower interest rates. Business owners with low credit scores in most cases won’t qualify for unsecured term loans.
  • Business line of credit. This type of financing provides a set amount of money companies can borrow against on an as-needed basis. It only needs to be paid back when the cash is used. Business credit lines are usually used to cover unexpected and recurring seasonal expenses. They come with relatively easy eligibility requirements compared with other funding options.

Alternatives to unsecured business loans

Unsecured financing options are available beyond the loan products in the previous section. They generally have less favorable terms, but they may be worth considering based on your business needs.

  • Invoice factoring lets you sell your outstanding invoices and receive cash in return. The online application process is relatively easy, and factoring is suitable for fast funding if you need emergency cash. (Funds could be deposited into your business checking account or bank account in as little as one business day.) Factoring companies typically don’t set minimum credit scores to qualify. However, they may check to see if you have established invoicing and accounting practices and may require a certain amount of time in business. However, you won’t need to provide a personal guarantee because you’re selling an asset — your outstanding accounts receivable — to the factoring company.
  • Invoice financing allows you to use your unpaid invoices to get a cash advance. In this case, the value of those unpaid invoices acts as a form of collateral, so the business owner doesn’t have to put up any other assets to back them. Qualifying for invoice financing is relatively easy. However, you must be aware you will likely pay interest on these loans at very high rates.
  • Merchant cash advances are usually easier to qualify for than business loans. They come with no credit score requirements. With an MCA, a lender advances you cash based on your recent sales, and you repay them with a portion of your future sales. This type of financing is risky and expensive, though, and should be treated as an option of last resort. It’s often the only type of funding available to new entrepreneurs running startups.

Unsecured business loans: The bottom line

For business owners that don’t have business collateral to back a loan, unsecured business financing could be the best small business loan option available to them. Others have a choice between secured and unsecured loans. Either way, it’s essential to know that unsecured financing could cost you a lot in interest and hidden expenses like upfront costs, origination fees, and prepayment penalties. Lenders must charge more to cover the risk of lending money without collateral to back the loan. And, if you don’t pay unsecured financing back, you could still lose personal and business assets to your loan company.

Carefully evaluate your options to determine if an unsecured business loan is the right funding option for you.

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