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.
Here’s more info from our experts to help your small business thrive.
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.
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.