What is an Unsecured Business Loan?

An unsecured loan is a business loan that does not require collateral in order to qualify. This type of funding is attractive to small business owners since they are not required to use their assets as collateral to receive financing. Unsecured loans offer a unique funding experience for business owners but are also more difficult to qualify for.

How Do Unsecured Business Loans Work?

Most term loans use collateral in order to provide financing. Lenders use a business’s assets like inventory, business equipment, and real estate to protect themselves from defaults.

An unsecured business loan makes sense for new businesses and owners who aren’t in a position to put their possessions on the line to receive funding.

Business owners who have opted to lease their business assets rather than purchase them outright may also prefer an unsecured loan.

While unsecured business lenders won’t require your company to provide collateral to receive funding, they find other ways to compensate for the risk they’re taking:

How Do Lenders Eliminate Risk?

Personal Guarantees

With a personal guarantee, you are acting as a co-signer for your business. This means if your business fails and is unable to repay its loan, you then become responsible for its remaining payments.

Blanket Business Liens

A lien is a legal guarantee that allows lenders to seize certain assets if an obligation isn’t met. A blanket business lien is also known as an “all assets” lien and allows a lender to pursue your personal assets until the loan is repaid.

It’s important to remember that an unsecured loan is still a loan, and, collateral or not, lenders find ways to protect themselves.

The Difference Between Unsecured & Secured Business Loans

Unsecured loans function just like any other loan. You receive cash upfront which is then repaid over an agreed upon period of time.

The difference between unsecured and secured loans is you won’t be asked to pledge assets, business or personal, in order to receive the funding your company needs.

Unsecured lenders may ask you to put up a personal guarantee. This protects lenders should your business become unable to pay its debt.

While a loan may be considered unsecured, lenders find other ways to ensure their investment is repaid. During the application process, don’t be afraid to ask questions and make sure you fully understand what you are agreeing to.

Short-Term Unsecured Business loans	Long-Term Unsecured Business Loans
Doesn’t require collateral
Online application
Multiple uses
Flexible repayment structure	Set monthly payments
No long-term commitment	Larger loan amounts
Higher interest rates	Lower interest rates

 

What Types of Loans Are Considered Unsecured?

Term Business Loans

Traditional term loans are given to their applicants as a lump sum and are repaid over the course of several years. These types of loans are best used to pay off large one-time purchases.

Short-Term Business Loans

Short-term business loans usually range from 3-18 months and are repaid in daily or weekly increments. Short-term loans offer a quick solution to temporary cash flow issues without a long-term commitment.

Business Line of Credit

Available through both banks and online lenders, a line of business credit provides companies with a more flexible funding option that can be both short and long-term. A line of business credit can be useful when you’re starting a project where the total cost has yet to be determined.

Inventory Loans

An inventory loan is a type of unsecured loan offered by both online and traditional lenders. Inventory financing is useful when there is an unexpected increase in volume or a delayed shipment leaving your product supply depleted.

Emergency Business Loans

Emergency business loans get your business the funds it needs to handle an urgent situation. This type of funding is often unsecured and primarily offered through online lenders.

Merchant Cash Advances

A merchant cash advance (MCA) is an advance, not a loan. MCA’s front your business an agreed-upon lump sum in return for a small percentage of your business’s future revenue

How Do I Qualify for an Unsecured Business Loan?

Qualifying for an unsecured business loan is similar to any other loan.

Before applying, ask yourself the following questions:

• Is my credit score above 500?
• Have I been in business for at least 6 months?
• Does my business generate a revenue of $10,000 a month or $120,000 annually?

If you answered yes to these questions, your company is likely to be approved by an unsecured lender. However, because you are looking for an unsecured loan, you won’t be able to offer collateral to make up for any shortcomings.

Individual lenders may require different qualifications so be sure to do your research before applying.

How Do I Apply for an Unsecured Business Loan Online?

When applying for an unsecured business loan, your lender will be looking to see if your company meets their qualifications.

Many lenders who provide unsecured business funding use an online application that makes applying quick and easy. You’ll provide basic business information as well as the amount of funding you’re looking to receive.

Applying online means less paperwork and no lines so you can spend less time waiting and more time running your business.

While filling out an application will help lenders determine whether or not your business meets their qualifications, it will also help you determine if an unsecured loan is right for you.

As you complete your application, you’ll also need to include documents to help prove your identity and confirm the information provided in your application.

What you will need to apply

• Bank statements
• Driver’s license
• Voided business check
• Proof of ownership
• Credit score
• Tax returns

What you may need to be approved

• A business plan to show how your business plans to increase profit
• An income statement as proof that your business is profitable.
• A balance sheet to help your lender understand what kind of payments your business can afford.

How Can My Business Use an Unsecured Business Loan?

Every business owner could use a little extra working capital at times. With unsecured business loans, obtaining those extra funds is simple.

Unsecured business loans are often repaid in a shorter period of time than traditional term loans. This makes this type of loan popular among businesses who aren’t looking for a long-term commitment.

With an unsecured short-term loan, business owners can cover small or immediate expenses without having to disrupt their business’s cash flow. Because the loan is unsecured, you also won’t be required to put your business’s assets on the line.

Some lenders deny businesses who are unable to provide collateral in their agreement. This makes it hard to be approved if you don’t own many business assets of your own.

Businesses operating out of a leased office or renting most of their equipment may find the solution to their funding needs in an unsecured lender.

Are Unsecured Business Loans Really Unsecured?

Unsecured loans offer businesses without the assets for collateralized loans a chance to receive the funding they’re looking for.

Where people start to question unsecured loans is when they’re asked to provide personal guarantees or business liens.

Lenders are taking a risk anytime they approve a loan. Without collateral, they must find other ways to protect themselves.

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

Looking for an Unsecured Business Loan?

If you need guidance and want to learn more about unsecured business funds, a Fast Capital 360 Business Advisor can help guide you in the right direction.

Give us a call today at (800)-735-6107 or click here to chat with one of our advisors.

Last updated December 12, 2018