Unsecured Business Loans: Busting Myths and Uncovering Hidden Truths

Whether you’re trying to take advantage of an opportunity or experiencing a seasonal slowdown, business owners need money from time to time. Getting a loan, however, carries risk both for the borrower and the lender. It’s common for traditional banks or U.S. Small Business Administration (SBA) lenders to mitigate that risk by securing loans with collateral or a personal guarantee from the borrower.

Secured loans move practically all of the risk to the borrower. For small business owners, that risk may defeat the purpose of getting a secured loan in the first place. That’s where unsecured business loans come into play.

In this article:

• Busting myths about unsecured small business loans
• The benefits of getting business funding unsecured
• What to look for, including lender reputation and unsecured business loan rates

What Is an Unsecured Business Loan?

An unsecured business loan is a small business loan that doesn’t require the borrower to put up any business assets, personal assets, or collateral to secure the loan. In a secured loan, a lender can seize collateral or any guaranteed assets if you fail to repay the loan. Since an unsecured loan doesn’t use collateral, the borrower doesn’t risk losing their collateral if they default.

There are many myths about unsecured business loans. Traditional financial wisdom has cast them as rare, exclusive, or carrying such high interest rates that they’re not worth it for most business owners.

Myths About Unsecured Business Loans

If you’re thinking you need an influx of working capital or a large lump sum to fund expansion and growth, then you need to know the facts about unsecured small business loans. Let’s bust some myths.

Myth: Loans Are Only Available From Banks

Once upon a time, banks, credit unions, and private investors were the only ones giving out small business loans. Today, entrepreneurs have far more financing options.

The FDIC’s 2024 Small Business Lending Survey Report found that banks’ market share in business lending is shrinking as online lenders and other private lenders using fintech make more loan options available to borrowers. Alternative and online lenders offer term loans, short-term working capital loans, lines of credit, equipment financing, commercial real estate loans, and many more loan products.

You should always explore all your options, and a bank may offer the best loan for your situation. But it’s important to note that you can get business funding unsecured from online lenders as well as traditional financial institutions.

Myth: You Need Great Credit to Get an Unsecured Business Loan

While it’s true that a good personal credit score or business credit score can help you lock in better interest rates and loan terms, it’s not necessarily essential to get an unsecured loan. There are many lenders out there today, and online lenders tend to have less strict eligibility requirements than legacy lenders.

Today’s lenders evaluate business performance, cash flow, growth potential, and time in business, in addition to creditworthiness. A new business already showing strong monthly or annual revenues and growth potential may not need collateral, although unsecured business loan rates may be higher if the owner has bad credit.

Myth: Unsecured Business Loans Are Only for Established Businesses

Many people believe that unsecured loans are only available to companies with a long time in business and a proven financial record. That’s not the case.

In today’s marketplace, many lenders operate almost like venture capitalists. They assess credit history, but more importantly, they want to see your business’s ability to generate revenue and repay the loan. A good business plan for how you’ll use the money goes a long way. Lenders may be willing to offer unsecured financing to a startup with a great business model because they know that the business will probably need capital to fund additional growth in the future.

Myth: Unsecured Business Loans Are Risky

Borrowing money always carries some risk. However, unsecured small business loans are no riskier than secured loans. In fact, it may make them less risky since you don’t stand to lose the asset collateral necessary to secure a loan.

Unsecured loans also tend to be less risky than other commercial financing arrangements like merchant cash advances (MCAs) or invoice factoring that structure repayment terms around future credit card sales or unpaid invoices.

Myth: Unsecured Business Loans Have Very High Interest Rates

There’s a kernel of truth here. Some lenders charge exorbitant unsecured business loan rates. Business owners with bad credit tend to get higher interest rates than those with good credit.

Rates range by lender, loan amount, type of loan, the business’s financial profile, and more factors. Lenders want your business, and with proper due diligence and comparing rates, most business owners can find unsecured loan rates that are comparable to secured business loan rates.

Remember, there may also be some flexibility in your monthly payments if you choose a variable rate instead of a fixed rate.

Myth: Unsecured Business Loans Have a Complicated Application Process

It’s true that traditional banks often require extensive paperwork, tax returns, and financial statements, but most online lenders allow you to complete an application entirely online in a matter of minutes.

Applying for a loan online requires minimal documentation and often provides fast funding. Even with unsecured business loans, after you’ve submitted to credit approval and had your application reviewed, the entire process may only take a few days.

Myth: Unsecured Business Loans Are Only for Emergencies

You can get business funding unsecured for all kinds of purposes. An unsecured business loan can help you meet both short-term and long-term business needs, without the added risk of losing your collateral. Upgrading equipment, buying new real estate, investing in a marketing campaign — whatever you need, an unsecured loan can help.

There are also more flexible unsecured funding options, like an unsecured business line of credit or business credit card.

The Bottom Line

Today’s loan marketplace is more competitive than ever. As more lenders emerge, business owners have access to a wide range of loan products and programs. This choice has helped make unsecured business loans accessible to more entrepreneurs and small businesses. That’s a great thing, because nobody wants to risk losing their business or their home if things don’t pan out with a loan.

This guide debunks some of the common myths about unsecured business loans, but it’s important to always do your due diligence before signing a loan agreement. Make sure you research a lender’s reputation, thoroughly compare rates between lenders, understand origination fees and qualification requirements, and completely trust a lender before you get into business with them.

FAQs

What is an unsecured business loan?

An unsecured business loan is a loan that doesn’t require collateral. While secured loans require borrowers to provide a personal guarantee of the funds or collateral that the bank can seize if they default, unsecured loans do not have that restriction.

Do unsecured business loans have higher interest rates?

Unsecured business loan rates do tend to be higher than secured loan rates, but it really depends on a range of factors, including the loan amount, loan type, and borrower’s financial profile. By shopping and comparing rates, you can usually find unsecured rates that are comparable to secured ones. It’s always good practice to compare to find lower interest rates.

How can you use an unsecured business loan?

There are several types of unsecured loans. You can use unsecured term loans or working capital loans to fund any business need, from payroll to inventory purchases. Usually, equipment financing or real estate loans that are tied to assets use the assets themselves as collateral, making them secured loans.

How do you get an unsecured business loan?

Before you apply for a business loan, you should have a precise plan for how to use the money. Then, shop for loans and compare rates by researching online or meeting with loan officers in person. When you’re ready to apply, many lenders allow you to do so online in minutes.

Are unsecured loans harder to get than secured loans?

Most borrowers will have more secured loan options than unsecured ones. However, you don’t need a sterling business record or credit history to qualify for an unsecured loan. You may just have to do a little more research into lenders.

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