Unsecured Business Loans: The Ultimate Guide (2021)

An unsecured business loan is a commercial loan that—unlike secured business loans—doesn’t require collateral, such as business property, equipment or savings, to secure the financing. Instead, an unsecured small business loan is issued on the basis of an applicant’s creditworthiness.

Looking for the best unsecured business loans out there? We’ll explain what they are, their place in the market, how they work, the possible risks and rewards and what you need to know to qualify and apply for one.

An unsecured business loan functions like many other forms of business funding: You receive cash upfront, and it’s repaid over a period of time. With an unsecured business loan, business owners can cover small or immediate expenses without having to disrupt cash flow.

Because an unsecured small business loan is often repaid in a shorter period of time, it’s popular for businesses that aren’t looking to have unsecured business loans for the long term.

This type of financing is also referred to as a signature loan because your own guarantee, via your signature, is what secures the funding. This is unlike secured loans, which are backed by collateral—physical or liquid assets that will be used to pay off the loan in case of default.

It can be a fast process to get unsecured business funding—sometimes it’s a matter of days to receive approval and the financing. You could even be approved to receive more funding with an unsecured loan.

The tradeoff is that lenders typically charge higher interest rates, require personal guarantees, place liens against the business— or all of the above— to compensate for the lack of collateral.

Types of Personal Guarantees for Unsecured Funding

A personal guarantee enables you to act as a co-signer to your own unsecured small business loan. If your business defaults on the loan and is unable to repay the balance, you, personally, are responsible for paying back the financing. Let’s take a look at the agreements a borrower could enter to obtain unsecured financing.

Unlimited Personal Guarantees

An unlimited personal guarantee means you must cover 100% of the loan amount in the event of business failure or payment default.

In these situations, lenders could come after any (or all) of your personal physical or liquid assets. This includes your car, savings and retirement accounts, your spouse’s assets as well as the interest and variable cost of legal fees accrued by the lender to recoup the full cost of the loan.

Limited Personal Guarantees

These types of personal guarantees are commonly used when multiple business partners get an unsecured loan together. Limited personal guarantees set boundaries for each partner’s liability in the event of default.

However, depending on the structure of your limited personal guarantees, it’s possible that you or your partners could be responsible for the full balance of the unsecured loan if another partner is unable to pay.

Blanket Liens

A blanket lien is a legal guarantee that enables a lender to seize any business or personal assets in order to settle a debt. For example, if an unsecured business loan obligation isn’t met, a lender may call upon a lien that allows them to take assets such as company machinery, vehicles or personal savings.

As long as you feel comfortable with the payments your business is being asked to make, personal guarantees and blanket liens shouldn’t be a problem. By doing your research and asking proper questions, an unsecured business loan can be a crucial financial tool for your business.

Let’s break down the different types of unsecured financing options and help you determine what’s the best choice of unsecured business loans for you.

Term Business Loans

Unsecured term loans are given to applicants as a lump sum and are repaid over a period of time — typically 1 year to 5 years. This type of large unsecured business loan is best used to pay off significant one-time purchases.

Short-Term Business Loans

Short-term unsecured loans usually reach maturity in 3-18 months and are repaid in daily or weekly increments. Short-term loans offer a quick solution to temporary cash-flow issues.

Business Line of Credit

If you’re looking for short- or long-term financing solutions, an unsecured business line of credit is a more flexible funding option ideal for multiple uses. This unsecured business finance option functions more like a credit card than a loan. Rather than receiving a lump sum of money you use to finance all or part of an expense, you have access to a set amount of credit that you borrow as needed. You pay back (and pay interest on) only the money you’ve spent.

Merchant Cash Advances

While it’s a form of unsecured funding, a merchant cash advance (MCA) is an advance, not a loan. You receive an agreed-upon lump sum in return for a percentage of your business’s future revenue. If you’re facing an unexpected emergency situation and have trouble obtaining quick unsecured loans, an MCA could work for you.

To get an unsecured business loan, lenders evaluate different elements of your company. Specifically, they’ll review the following factors:

• The overall health of your company (generally revenue)
• Your business and personal credit score
• Consistent cash reserves
• Time in operation

Qualifying for an Unsecured Business Loan

Individual lenders may have different business loan qualifications, so be sure to do your research before applying for an unsecured small business loan.

However, in general, it’s helpful if you meet the following criteria:

• A credit score of 500 or higher
• Been in business for at least 6 months
• Your business generates revenue of $10,000 a month or $120,000 annually

If you meet these qualifications, your company might be approved for unsecured business funding.

Before entering into an unsecured loan agreement, you should look at both the positives and negatives.

Advantages

Speed of Funding

Typically, getting an unsecured business loan isn’t as involved or time-consuming as types of secured business funding. Because many fast unsecured business loans are offered through alternative funding companies, applications are expedited, only requiring certain pieces of information to get the funds in your account.

Asset Protection

Pursuing unsecured business financing eliminates the need to use any business or personal assets as collateral.

Larger Loans Possible

It’s possible for applicants to get larger loan amounts with an unsecured business loan. This is because secured business loans typically limit your loan amount up to the value of the collateral you’re offering on the financing. It’s more common, however, for secured lenders to approve you for a percentage of the collateral you’re pledging.

Disadvantages

Higher Rates

Without collateral to back the financing, unsecured loans pose more of a risk to the lenders who issue them. For borrowers, this can mean higher rates.

Personal Guarantees

Unsecured business lenders require personal guarantees or blanket liens to make sure they get their money back in the event of a business failure or payment default.

Shorter Repayment Windows

Whether you apply for an unsecured loan online or you’re planning to work with a conventional financial institution, lenders view unsecured loans as riskier than their secured counterparts. Because of this, lenders will ask you to pay off the loan in a shorter time frame.

The health of your personal credit and other business factors could improve the length of your repayment window.