Unsecured business loans offer business owners the financing they need without requiring collateral. From purchasing inventory or equipment to hiring staff and acquiring a workspace, an unsecured business loan can facilitate growth and expansion for any small business. While unsecured business loans can be great for providing financing, many small businesses may benefit from an alternative option. In this guide, we’ll explore what unsecured business loans are, how they work, and how to get one.
What is an Unsecured Business Loan?
An unsecured business loan is a type of financing that doesn’t require collateral. While secured loans require borrowers to pledge assets such as real estate or equipment as security, unsecured loans are approved based on the creditworthiness of the borrower. For new business owners seeking their first loan, lenders typically evaluate the applicant’s personal credit score and business credit score. However, applicants with an established business and a strong business credit score could be evaluated on their business credit score alone. All other things being equal, a higher credit score generally improves the changes of getting approved for an unsecured business loan with better rates.
With unsecured business loans, borrowers face no threat to their assets. However, late payments or a default may hurt their credit score (personal or business, depending on which is applicable) and their ability to borrow in the future.
How Unsecured Business Loans Work
The disbursal and repayment process for any unsecured business loan depends on the type of loan you’ve applied for. In most cases, an unsecured business loan refers to a term loan. Term loans involve a lumpsum disbursal combined with fixed monthly payments for a predetermined repayment period. Loan amounts are generally lower for unsecured term loans compared to secured term loans, and terms can last as short as six months to years, depending on the lender you choose.
Parts of an Unsecured Business Loan
When evaluating an unsecured business loan, you should consider the different parts of the loan that impact the total length and cost. Parts of an unsecured business loan to review include:
Interest Rate: This is the percentage charged by the lender on the principal amount borrowed. Many unsecured business loans have a fixed rate, though keep in mind that a variable rate loan means the interest can change during the life of the loan.
Loan Term: The loan term, sometimes known as the repayment term, is the period over which the loan is to be repaid. Loan terms can be a short as months to as long as years. Longer terms often mean lower monthly payments but higher total interest payments.
Repayment Schedule: Repayment is the process of paying back the borrowed money to the lender. Repayment schedules could be daily, weekly, or monthly, depending on the lender.
Uses: Some lenders outline specific uses for the loan, such as equipment purchases or payroll financing. Make sure that the unsecured business loan can be used toward your specific needs.
Unsecured Business Loan Benefits
Unsecured business loans offer applicants some excellent benefits, including:
- No collateral required: Applicants won’t have to put up any assets to secure the loan, which can be beneficial if you don’t have valuable assets to use as collateral or if you’re uncomfortable with the risk.
- Quick access to funding: With no collateral required, the loan approval process is typically faster than with secured loans. Some applicants receive their funds within a day of being approved (though approval and disbursal timelines vary by lender).
- Accessible financing option: One advantage of unsecured business loans is that most applicants can usually find a lender that meets their needs.
- Versatility: Most small business loans can be used for anything from refinancing an existing loan to consolidating debt, expanding operations, buying more inventory, and covering operational expenses.
Unsecured Business Loan Drawbacks
Here are some drawbacks of unsecured business loans that business owners should be aware of:
- Higher interest rates: Because unsecured loans are riskier for lenders, they often come with higher interest rates than secured loans. On the flip side, secured loans can offer borrowers access to lower interest rates.
- Stricter eligibility requirements: To qualify for an unsecured business loan, you’ll need to have a strong credit history and a proven track record of revenue and profitability.
- Less desirable terms: Lenders may be less willing to issue large loan amounts since unsecured loans are riskier. Borrowers may be approved for a smaller loan and a shorter repayment period.
Secured vs Unsecured Business Loans
Business owners must determine which business loan best fits their needs. While a secured loan can sound risky, it could lead to better terms and rates. On the other hand, an unsecured loan may be a better fit for borrowers with great business or personal credit.
| Unsecured Loan | Secured Loan |
| Collateral not required | Collateral is essential |
| Potentially higher interest rates | Collateral allows for lower interest rates |
| Ideal for borrowers with good credit | Suitable for all borrowers, including those with lower credit or a short credit history |
| Borrowing limits may be lower due to higher risk | Less risk for the lender could mean a higher borrowing limit |
| Defaulting on the loan may mean long-term credit damage and having accounts sent to collections. | Lenders will usually seize the collateral if the borrower defaults on the loan. |
Who Offers Unsecured Business Loans?
Small businesses can get an unsecured business loan from a variety of sources, including banks, credit unions, and online lenders. Banks and credit unions usually offer the best rates and borrowing limits; however, the application and approval processes may be longer and more tedious. Online lenders can issue faster loans and may have fewer eligibility criteria but may have higher interest rates.
It’s a good idea for business owners to compare multiple different lenders before applying for a loan.
4 Steps to Get an Unsecured Business Loan
Getting an unsecured business loan doesn’t have to be complicated. Here’s a simple four-step process to help you secure business financing.
Check Your Business Credit Score
Before applying for a loan, it’s essential to know where you stand. Check your business credit score to see if you meet the lender’s minimum requirements. You can get a free copy of your business credit report through credit bureaus like Experian and Dun & Bradstreet. While specific credit score requirements vary from lender to lender, generally, a higher credit score will increase your chances of approval and may qualify you for better terms and lower interest rates.
Gather Required Documents
Most lenders will require documentation to verify your business’s financial health and creditworthiness. Commonly required documents include:
- Business agreements, licenses and permits (if applicable)
- Business tax returns
- Profit and loss statements
- Balance sheets
- Bank statements
Research Options
Once you know your credit score and have gathered your financial documents, it’s time to research your lending options. Compare interest rates, loan terms, and repayment options from different lenders to find the best fit for your business. Don’t forget to look for any fees and charges associated with the loan.
Submit Your Application
Once you’ve chosen a lender and loan, the next step is to submit your loan application. Be prepared to provide detailed information about your business, including its financial history, revenue, and the purpose of the loan. Most lenders accept applications online, but the exact process and information requested may vary. Contact your lender if you’re unsure about your application. After you’ve submitted your application, the lender will review it and let you know if you’ve been approved for a loan.
Unsecured Business Loan Alternatives
While unsecured business loans can be a great option for many businesses, they’re not the only solution. Here are some alternative financing options to consider.
Lines of Credit
A business line of credit works similarly to a credit card, allowing you to borrow up to a predetermined limit as needed. You only pay interest on the amount you borrow, making it a flexible financing solution. However, unlike a business credit card, you won’t earn rewards and may have to contend with minimum withdrawal amounts or penalties for non-use.
Invoice Factoring
If your business invoices customers for goods or services, you may be able to use those invoices to secure financing. Invoice factoring offers you financing upfront for your unpaid invoices, providing you with immediate cash flow. Invoice factoring is ideal for business owners dealing with slow-paying customers. However, business owners typically receive less than the total value of their invoices.
SBA Loans
The U.S. Small Business Administration (SBA) offers several loan programs designed to help small businesses access the funding they need. SBA loans often give borrowers more flexible underwriting criteria than traditional loans. The SBA Guarantee helps protect lenders and reduces their risk, which may translate into more attractive terms and rates for borrowers.
Business Credit Card
Similar to a line of credit, a business credit card allows you to use money as you need up to the credit limit. One benefit of business credit cards is that many offer rewards and perks to business owners. Keep in mind that business credit cards come with higher APRs, so this can become an expensive financing option if you don’t pay off your statement on time and in full.
Unsecured Business Loan FAQs
Can SBA loans be unsecured?
An SBA (7)a loan does not require collateral if you’re borrowing under $50,000. For loans ranging from $50,001 to $500,000, collateral is a requirement.
How do you qualify for an unsecured business loan?
To qualify for an unsecured business loan, you’ll need to meet the lender’s approval criteria. Usually, this requires a strong credit history, a proven track record of revenue and profitability, and a solid business plan. Lenders will also consider factors such as your business’s industry, the purpose of the loan, and your ability to repay the loan. For first-time borrowers, personal credit may make a difference. However, those with established business credit may not need to worry about their personal credit, provided their business accounts are in good standing.
What is a personal guarantee?
A personal guarantee is a promise by the business owner to personally repay the loan if the business is unable to do so. Personal guarantees are common for unsecured loans and provide an additional layer of security for the lender. Some small business lenders may include a personal guarantee in your loan contract.