Unsecured Small Business Loans

Unsecured loans are issued on the basis of an applicant’s creditworthiness, rather than the physical property or assets an applicant can pledge to secure it. While secured business loans leverage collateral to guarantee the financing, unsecured loans don’t.

The benefit of getting an unsecured loan is that you’re able to obtain funds fast — possibly in a matter of days. It’s possible you could even be approved for more funding with an unsecured loan.

The tradeoff, however, 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.

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.

What Is an Unsecured Business Loan?

Put simply, unsecured business loans are commercial loans that don’t require collateral.

Rather than leverage a type of physical asset (home, car, savings account, etc.), you obtain financing through the strength of your creditworthiness. An unsecured debt definition also can refer to a signature loan. In this agreement, your own guarantee, via your signature, is what secures the funding.

While no collateral is involved, this type of loan product can be more difficult to obtain because of the guarantees required.

How to Get an Unsecured Business Loan

To get an unsecured business loan, lenders evaluate different elements of your company. Specifically, they’ll review your time in business, annual revenue and your personal credit score. 

Before receiving an unsecured business loan, you’ll most likely need to sign a personal guarantee. This assures that in the event your business can’t repay the loan, you personally will repay the remaining balance to the lender.

Qualifying for an Unsecured Business Loan

Unsecured lenders are most concerned with:

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

Before applying for any unsecured funding, ask yourself:

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

If you answered “yes” to these questions, your company may be approved by some unsecured lenders.

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

How to Apply for an Unsecured Business Loan Through Fast Capital 360

While you can obtain one of these loans from a conventional bank or credit union, applying for a fast unsecured business loan online means less paperwork and no traveling, meaning more time for you to focus on running your business.

Through Fast Capital 360’s simple online application, you can qualify for an unsecured loan in as little as an hour and learn about your funding options all in one place.

How Can My Business Use an Unsecured Business Loan?

Every business owner could use a little extra working capital at times. With unsecured small business loans, obtaining those extra funds can be simple and fast.

Because unsecured small business loans are often repaid in a shorter period of time than conventional term loans, they’re popular for businesses that aren’t looking to get involved in a long-term loan commitment.

With a quick unsecured business loan, business owners can cover small or immediate expenses without having to disrupt cash flow. 

Let’s take a look at some unsecured loan examples.

Additional Working Capital

Whether you’re waiting on a customer payment or dealing with a seasonal lull, even the healthiest businesses may need an infusion of capital at times. Funds from an unsecured working capital loan can help carry your business through periods of uncertainty.

Emergency Expenses

As with everyday life, unexpected things happen in business. When you need funds as fast as possible, the ability to secure an unsecured loan quickly can help you immediately address the financial hardships you didn’t see coming.

Growth Opportunities

Sometimes the moment you’ve been hoping for happens when your cash reserves aren’t deep enough to cover the cost. When your business has a chance to expand, unsecured funds can help you execute and expedite your plans and bring your company’s vision to life.

The Different Types of Unsecured Loans

Let’s break down the different types of unsecured loan options available.

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. These types of large unsecured loans are best used to pay off significant one-time purchases.

Short-Term Business Loans

Short-term unsecured 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. 

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. 

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. Think of MCAs as emergency business loans: You can obtain fast funding for unexpected situations.

The Need for Uncollateralized Business Loans

In 2018, 43% of U.S. companies applied for business funding, according to the 2019 Federal Reserve Small Business Credit Survey. Of these companies, 47% received the full amount of funding they sought while 53% obtained less funding. Indeed, 35% of applicants who weren’t approved for at least some of the financing sought had insufficient collateral, according to the survey. 

Enter unsecured loans — an alternative form of financing that small businesses should be aware of.

How Do Unsecured Business Loans Work?

Unsecured loans function like any other loan: You receive cash upfront which is then repaid over a period of time.

Many small business lenders require a form of assurance before approving a loan. Indeed, secured business loans are backed by collateral such as business equipment and real estate, to protect lenders from defaults.

With unsecured business lending, you aren’t providing a physical or liquid asset to obtain financing. Instead, unsecured business finance companies ask that you provide an alternative method of security to receive the funding.

The Difference Between Unsecured and Secured Business Loans

Indeed, the difference between unsecured and secured loans comes down to collateral. This difference has a big impact on terms.

With unsecured loans, lenders find other ways to ensure their investment will be repaid. Often, unsecured lenders will ask you to sign a personal guarantee which protects them in the event that your business is unable to pay its debt. To continue evaluating unsecured vs. secured loans, let’s further compare and contrast the differences between these two types of funding.

The Role of Collateral in Secured and Unsecured Loans

Lenders use a business’s assets (such as business equipment and real estate) as a form of collateral to protect themselves from businesses defaulting on an unsecured loan. Typically, this is a very common way of obtaining secured business funding. However, there are also no-collateral business loans that can provide a useful solution in today’s market.

We know the majority of small business owners (53%) that sought financing obtained less funding than they planned. Reasons for credit denial included a low credit score, having too much debt already, insufficient collateral or too new or insufficient credit history. 

Many businesses throughout the U.S. have a need for an uncollateralized loan. For instance, many business owners decided to lease their business assets rather than purchase them outright. To secure meaningful funding that will allow businesses to expand, owners need access to no-collateral small business loans.

Why Do Unsecured Loans Have Higher Interest Rates Than Secured Loans?

Interest rates on unsecured loans are often higher than secured business loans because not backing financing with collateral poses a greater risk to lenders.

While an unsecured business loan allows a borrower to avoid the risk of putting valuable personal or business assets on the line in exchange for working capital, lenders still do everything they can to reduce their risk. Besides charging higher interest rates, there are a few common tactics these lenders can take.

For example, if a borrower were to default on unsecured financing, the lender wouldn’t have collateral to seize as a means of making up the financial loss. Instead, the lender would recuperate losses by calling on a borrower’s personal guarantee or exercising any liens placed against the business.

The Ways Lenders Eliminate Risk

Here’s how unsecured lenders limit their risks:

Personal Guarantees

Personal guarantees enable you to act as a co-signer to your own business. The stakes can be high for the borrower: If your business defaults on the loan and is unable to repay the balance, you, personally, then become responsible for paying back the financing.

Unlimited Personal Guarantees

An unlimited personal guarantee means you’re on the line to cover 100% of the loan amount.

Business failure or payment default could trigger your lender to come after any (or all) personal assets you have. This includes your car, personal savings, retirement accounts, children’s college savings and 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 look to get an unsecured loan together. Limited personal guarantees set boundaries for each partner’s liability in the event of default.

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 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 an issue. By doing your research and asking proper questions, an unsecured business loan can be a crucial financial tool for your business.

Advantages and Disadvantages of 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. Here’s the simplest comparison of how collateral is used in secured loans vs. unsecured loans: 

• If you default on your loan, your assets would be taken to satisfy the debt with a secured loan. 
• If you were to default on an unsecured loan, your assets (business or personal) can’t be seized without litigation.

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 and shorter terms.

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. 

Difficult Qualifications

While it’s possible to obtain a guaranteed unsecured loan, it’s just as likely that getting the funds your business needs to grow can present their own obstacles. Ultimately, your business’s annual revenue, daily balance, time in business and your personal credit score dictate the options available to you. 

If your business is lacking in one of these categories, unsecured financing could be a challenge for you to secure, though there are unsecured loans for bad credit available.

Smaller 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, but it likely isn’t to extend beyond 36 months.

Finding the Right Unsecured Loan for You

From merchant cash advances to business lines of credit, there’s an unsecured business loan available to fit your needs. 

With accessible qualifications and quick-funding features, unsecured loans offer you the ability to reach your goals on-time or ahead of schedule.