Many lenders require business collateral when applying for a business loan. If you don’t have collateral or don’t want to use your assets to protect your loan, you can get an unsecured business loan. This type of loan can be used for a variety of purposes, including expanding your business, purchasing inventory, or covering unexpected expenses.
Several different business loans are made without collateral. You should consider all your options before applying to ensure that you make the best decision when getting an unsecured business loan.
What is an unsecured business loan?
Unsecured business loans are a type of business loan that does not require collateral. Collateral is a value item that you use to secure a loan. Having collateral will help lenders feel more at ease with which they will pay the loan, or if there is a default on payment, they can seize assets to pay the loan. However, in some cases, it is best to not use them to protect your assets and secure a loan.
Unsecured business loans do not have collateral, so lenders take more risk when lending money to businesses. Therefore, some types of unsecured business loans may have stricter eligibility requirements or higher interest rates than secure business loans.
How unsecured business loans work
Unsecured business loans work just like any other type of business loan. Submit your application and wait for the lender to decide. If approved, you will receive the funds and pay them over time.
Because collateral is not involved, lenders are usually more selective about who to offer unsecured term loans, especially if they want something with a low interest rate. They also tend to ask business owners to provide their companies with personal guarantees. This promises to repay the loan from personal funds if the company is the default for the loan.
Some types of unsecured business loans have more relaxed eligibility requirements and are available to poorly credited business owners. This includes factoring invoices and merchant cash advances. However, these types of bad credit loans cost a lot of money, including high interest rates and fees.
Some lenders also require a Uniform Commercial Code (UCC) lien. A UCC lien is a claim against the company’s assets. If your company fails to pay the loan, the lender will come after these assets to collect the loss.
Types of unsecured business loans
There are many different types of unsecured business loans. Term loans and business line credit lines are often considered the best unsecured business loans for business owners with excellent credit credits, but it is possible to find unsecured business loans for bad credit borrowers.
Period loan
With term loans, you specify how much you want to apply for a loan and why you want to borrow and why you want to get the loan. If the lender approves your application, you will pay the funds in a lump sum to your bank account. After that, you will repay the loan in normal installments, usually 1-5 years or more.
If you make a specific purchase and pay it in the long term, a term loan is popular. You can find both secure term and unsecured loans from a variety of lenders. You must specify when applying to an unsecured loan.
Credit business line
The business line of credit lines acts like a business credit card, allowing businesses to borrow money up to preset limits. You can only pay interest on unpaid balances and withdraw funds from the line of credit multiple times. While it is possible to get an unsecured business line, the maximum loan amount and interest rate may not be as favorable as a secured business line.
These are popular with businesses who want to have the flexibility to cover unexpected costs, but the cost of a credit line can be higher than a term loan.
Invoice factoring or funding
Invoice factoring involves selling unpaid invoices to lenders at a discount. This allows you to get your bills paid immediately, rather than waiting for your customers to pay you. For example, if you have an unpaid invoice of $5,000, the factoring company can buy it from you and, once the invoice is paid, give you 85% of the amount ($4,250) and release the remaining removal fee.
Invoice Financing uses unpaid invoices to secure your loan and offers up to 90% advance payments on your invoice. But instead of selling the bill to the lender, they collect the bill and repay the loan amount and fees to the lender when the customer pays.
Funding or factoring your invoices can be expensive, but many factoring companies do not require personal guarantees or collateral. This is because the loan is protected by an invoice and reassures the lender that once the invoice is paid, the loan will be processed.
Merchant Cash Advanced
Merchant Cash Advance involves prepaid cash based on a typical number of sales for a company. You can then use your money to cover unexpected costs and buy stock. This type of working capital loan is risky and is often used by poorly credited business owners.
Automatically repay merchant cash advance through future sales percentages. These can be good options that will help you cover seasonal and other short-term cash issues, but they can become very expensive, exacerbate your cash flow issues and put you in a debt cycle. You can also use this option if you are confident that you can repay it quickly in an emergency.
Where to get unsecured business loans
You can find unsecured business loans from two common types of lenders, each with advantages and disadvantages.
- Online lender. These companies include fintech lenders like financing. Alternative lenders tend to have quick online applications and timelines for funding, making them suitable for businesses that require quick cash. However, if your company has fewer credits than the star, they often charge a higher fee.
- Banks and credit unions. These are traditional brick-and-mortar lenders that may have an online presence. They usually have slower processes and more stringent lending requirements, but there may be unsecured business loans with more favorable interest rates and terms. It is also suitable for businesses looking for a more face-to-face experience.
Unsecured business loan alternatives
If you don’t think an unsafe business loan is the best for your business, there are alternatives to explore.
- Safe business loans: These loans require collateral such as real estate, vehicles, and inventory. They can receive low interest rates and favorable repayment terms on secured loans, as they pose less risk to lenders.
- SBA Loan: A variety of unsecured and secure loans are available through SME management for use in working capital, equipment, construction projects, and more.
- Secured credit lines: A secured credit line offers simpler eligibility requirements and may accept poor credit for startups and business owners.
- thisSiness Grants: Business grants award businesses with money that does not have to repay or return business assets. The downside is that grants are very competitive as it is likely that many companies are applying for them with you.
- Crowdfunding: Crowdfunding options allow businesses to raise capital through public contributions, either as a donation or in exchange for compensation or fairness.
- Peer-to-peer (P2P) loan: Using a specialized lending platform, companies connect directly with investors who want to fund their efforts.
- Business Credit Cards: A secure business credit card requires cash deposits to open an account, and the amount of deposits is usually credit limit. Both unsecured business credit cards can help you build business credits.
Conclusion
The advantage of unsecured business loans is that they can be a great way for businesses to borrow money without the need for assets to secure a loan. Although the IFYour business doesn’t have a big financial, there is no bad credit, secured loans are easier and more affordable to qualify.
Make sure to shop and compare multiple offers before applying for an unsecured business loan. If you put your effort into it, you can find the best small business loans to help you achieve your business goals.
