In the right circumstances, unsecured business loans may be more desirable than their secured counterparts for a couple of different reasons.
As a small business owner, if you’re just starting out or are ready to scale your existing business, you may be on the hunt for capital to grow your enterprise.
After crunching the numbers and figuring out just how much it’ll cost you to get the wheels in motion, you might find that doing so comes with a hefty price tag.
So how can you get your ideas off the ground or expand your business when you have shaky credit, don’t have a lot of collateral, or aren’t keen on offering up your assets?
You may have looked at a variety of ways to get funding for your small business, and found that getting qualified for a small business loan isn’t easy.
This is why unsecured business financing, and unsecured business loans specifically, can be so attractive.
We’ll walk you through what unsecured business loans are, how they’re different than secured business loans, how you can position yourself to get approved for unsecured business loans, and how they could ultimately help you with your small business’s goals.
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What Are Unsecured Business Loans?
In a nutshell, unsecured business loans are a type of financing where you don’t have to provide collateral.
That is the major difference between unsecured business loans and secured ones.
Collateral essentially means valuable assets that you own personally or your business owns.
Because loaning money presents such a high risk for creditors, in most cases as a borrower you’ll need to provide some sort of collateral.
This protects the lender in case the borrower isn’t able to make payments and the loan goes under water.
In the case that you aren’t able to pay back the loan, the lender can seize the collateral and liquidate it to regain its losses.
However, with unsecured business loans, the lender can’t go after your assets.
“With secured business loans, the lender will take title to the assets being used as collateral for the loan,” explains Christine Dura, M.Ed., and Chief Development Officer for OrthoNOW.
“This can include inventory, a home, a car, investments or other assets that can be converted to cash.
With unsecured business loans, there is no collateral provided for the loan and the funding is granted upon the creditworthiness of the borrower.”
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The Advantages of Unsecured Business Loans
There are many advantages of unsecured business loans, which include:
No Collateral Required
As we already touched on, this is probably the top benefit of getting financing through unsecured business loans.
“They [unsecured loans] allow the borrower to obtain funding while not risking the loss of a previously held asset,” points out Dura.
To get approved for unsecured business loans, you don’t have to put your assets on the line.
Borrow More
Dura also points out that in some cases, the amount of money that can be borrowed on unsecured business loans can be higher.
That’s because there’s no value ratio assigned to the pledged asset.
When it comes to secure financing, the value of loan can’t exceed a percentage of the value of your collateral.
Because unsecured business loans don’t require any collateral, there may be higher limits as to how much you can borrow.
Depending on the lender and the type, with unsecured business loans, you might be able to borrow anywhere from $2,500 to 1 million.
Quick Approval
You can skip getting an appraisal of the assets you’ll be ponying up for collateral, and this is at least part of the reason that unsecured loans for business can have a quicker approval process.
The average processing time for a secured loan takes three to four weeks.
Depending on the lender, with unsecured business loans you could be approved within 48 – 72 hours.
Easy Loan Application
“The process is less cumbersome in terms of paperwork,” points out Dura.
And because there is less paper to push, it might even be easier to get approved for these types of business loans – nice!
Flexible Use of Funds
Secured loans may have more rules and limitations on what you can use the borrowed money for.
They often need to be used for a specific purpose, such as purchasing equipment or inventory.
Unsecured business loans, on the other hand, may offer greater flexibility in how you use your money.
Unsecured business loans can be used for a variety of growth activities, like investing in new computers for your office, renovating your store, or even covering payroll during a slow month.
Poor Credit Forgiveness
This really depends on the lender and their requirements, but another advantage of unsecured business loans is that lenders might be more open to funding borrowers with poor credit.
Other lenders may actually have more stringent credit requirements; it really depends.
If your credit is shaky or you don’t have much of credit history, to begin with, it may be challenging for you to be approved for a secured business loan.
This isn’t always the case, so you’ll want to check all your options to see what each lender’s minimum requirements.
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The Downsides of Unsecured Business Loans
While there are many advantages to unsecured business loans, there are also some downsides to keep in mind:
Higher Interest Rates
If you’re not willing or able to provide collateral, prepare to fork over a lot of interest to make up for it.
The interest rates on unsecured business loans can be much higher than secured loans.
So while the process may be quicker, know that you’ll be paying more for the convenience of unsecured financing.
Short Terms
“Unsecured business loans also come with shorter repayment terms, so you’ll need to make payments and pay off the loan quickly.“ explains Dura.
Whereas the repayment period for secured business loans can be several years, you’re looking at a repayment period of closer to 12 to 18 months for unsecured business loans.
Be sure to do your math before you accept an offer – with higher rates and a shorter repayment term, your APR could easily reach the triple digits.
Inflexible Repayment Terms
And while there is greater flexibility in how you use loan funds, unsecured business loans normally have less flexibility when it comes to repayment.
For instance, if you agreed to pay $500 a month for two years, it’s not likely you’ll be able to change the schedule or repayment structure down the line.
So think carefully about the terms you agree to in the beginning; you’ll most likely be stuck with them for the full duration of the loan.
Loan Amounts Are Capped
With unsecured business loans, there is a potential for you to borrow more money than with collateral, but there is still a cap on how much you can borrow.
In a secured business loan the amount is usually capped according to how much collateral you are able to offer, but with unsecured business loans, there is a set maximum.
So if you need more money than is available, you may need to look into multiple sources of funding.
No Tax Benefits
While the interest on some other types of loans are tax-deductible, with unsecured business loans you’re not going to be able to deduct it from your taxes.
You’ll want to factor this in when deciding whether or not unsecured business loans are a good choice for your small business.
Your Options for Unsecured Business Loans
We at LendGenius work with a variety of lenders with different types of unsecured business loans:
Unsecured Term Loans
A term loan could be an attractive option if you are planning to purchase major equipment for your small business or get an infusion of capital that is vital to growing your business at some point during your life cycle.
To qualify, you’ll need to demonstrate a degree of fiscal soundness, such as having strong credit or have been in business for a number of years.
With unsecured business loans like these, there’s usually longer repayment terms and lower interest rates.
It also comes with a set repayment structure, and you make monthly payments.
However, the application process is usually lengthier, and you may even be penalized if you prepay.
If you get a term loan with a variable interest rate, your interest rate may increase during the duration of the loan, and you’ll ultimately be paying more for the same loan.
Term loan amounts can vary from $25,000 to $500,000 with 7% to 30% interest rates.
The term of the loan could be anywhere from one to five years, and it could take only 48 hours to process and approve your application.
Short-Term Unsecured Business Loans
This is the mini-me version of a term loan.
As you might’ve guessed by the name, short-term unsecured business loans have a shorter time frame in which you’ll need to pay it off by – the capital sum is smaller as well.
Short-term business loans are ideal if you need capital to overcome a temporary financial hurdle, pay off higher-interest debt, or jump on an unanticipated opportunity.
Note that interest rates for short-term unsecured business loans are higher than standard term business loans, and you’ll need to pay off your loan within two years.
Whereas you make payments on term loans every month, with a short-term unsecured business loan you may be required to make payments weekly, even daily.
While the turnaround is quick, there’s relatively little paperwork, and you can use the funding for a variety of purposes, the APR can be quite high.
Personal Loans for Business
While you are personally liable for a personal loan, you can borrow this way to fund your business too.
Whereas your businesses’ credit history, financial outlook, and business plan are closely reviewed when applying for a business loan, if you’re applying for a personal loan, your income and personal credit history is what’s being scrutinized.
This may be a good option if you are a new business and don’t have much of a track record.
Personal loans can take as little as four days to fund.
Interest rates can range anywhere from 4 to 36% and the term of the loan is up to seven years.
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Unsecured Lines of Credit
Instead of unsecured business loans, a lender may offer you an unsecured line of business credit.
Whereas unsecured loans are a type of installment loan, which means you receive a set amount and are responsible for paying it off in installments, an unsecured line of credit is a type of revolving credit.
Similar to unsecured business loans, an unsecured LOC isn’t backed up by collateral.
If you’re approved, it would be for a predetermined amount, and you won’t need to take out the money all at once.
And like unsecured business loans, an unsecured line of credit can be used for a variety of things related to your business: for inventory, to pay employees or just monthly bills during a slow month, the money will be there when you need it in a pinch.
You only will need to pay interest on the amount you withdraw.
However, the loan repayment times can be shorter and the interest rates higher on unsecured business lines of credit.
A business line of credit is worth considering for emergency expenses, downturns in your small business, or unanticipated opportunities.
The loan amounts can be anywhere from $10,000 to $1 million, and the loan terms can be anywhere from six months to five years.
Interest rates can range from 7% to 25%, and your request might be processed and approved in as little as 48 hours time.
Merchant Cash Advance
A merchant cash advance (MCA) is another way to obtain unsecured financing for your small business.
It’s not really a loan, it’s more of an advance on your future revenues.
Once you get approved, the funds are deposited into your business account.
It’s a quick and easy way to obtain capital if you need it in a pinch.
However, the interest rates tend to be quite high with an MCA.
How it works is that payments are automatically deducted from revenues generated on your merchant account every day until the advance is paid off.
If you went out of business, you would not have to pay back the advance.
Merchant cash advance (MCA) can take as little as seven days to get approval, and loan amounts can range anywhere from $2,500 to $250,000.
Qualifying for Unsecured Business Loans
Income Requirements
While you don’t need to offer collateral, there are still income requirements to get approved for unsecured business loans.
This depends on the lender, but because you aren’t offering collateral, you need to show a proven track record of solid income.
Having a solid income and employment history usually weighs more heavily than if you were applying for a secured loan.
Credit Requirements
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Depending on the lender, you have to prove your creditworthiness to get approved for unsecured business loans.
The creditor will also take a look at your other debts.
You’ll need a high credit score and solid credit history.
Some online lenders are more forgiving and may approve you for unsecured business loans even if you have poor credit or lack credit history.
However, if this is the case, you might have a higher interest rate on your loan.
Writing a Business Plan
While the funds for unsecured business loans can be used for a variety of reasons, have a clear business plan in place to show how the capital will be used to grow or improve your small business.
It’ll prove to the lender that you have defined solid, concise short-term and long-term goals, and have an idea of how you’ll be spending your capital.
Relationships Matter
“If you have a previously established and solid relationship with your lender, you’ll have a better chance of getting approved for unsecured business loans,” says Dura.
“Plus, it’s an excellent way to strengthen your relationship for the future, and ensure future funding.”
If you worked with a lender before, have taken out a loan, and have been timely with your historical payments, this will boost your odds of getting an unsecured loan.
Ideally, you’ll want to have established rapport with the lender before you submit an application for unsecured business loans.
Due Diligence
When you apply for unsecured business loans, you’ll want to avoid common mistakes that small businesses make that could kill their loan application, such as a low deposit volume, not enough deposit revenue, incurring negative balances, not checking your credit, and not doing your homework beforehand.
You’ll want to make sure you have your financial ducks in a row and do all you can to be a strong candidate for lenders.
Know the Law
Find out whether the lender can sue you, take money directly out of your bank account, or send your debt to collections for any reason.
If you’re not careful and default on your obligation, it could send your credit spiraling.
Like anything, you’ll want to read the fine print and ask plenty of questions before signing up for unsecured business loans.
Be sure you’ll be able to meet the terms and conditions of the loan and make the payment requirements.
“If you don’t want to risk an asset, need the money quickly, and want the flexibility to have cash-on-hand on-demand to grow the business or meet short-term needs, then an unsecured business loan may be a good option for you,” says Dura.
Of course, you’ll want to do your homework, read the fine print, and look at all your available options before making a choice that will affect your business so greatly.
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