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 them, unsecured loans do not.

The benefit of getting an unsecured loan is that you’re able to get the funds you need very quickly, within 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 this lack of collateral.

In this guide, we’ll define what is an unsecured loan, their place in the market, how they work, the possible risks and rewards and finally what you need to know to qualify and apply for one.

How to Get an Unsecured Business Loan

In order to get an unsecured business loan, lenders evaluate different elements of your business. Specifically, they review your time in business, annual revenue and your personal credit score.  

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

Qualifying for an Unsecured Business Loan

The requirements to get a business loan are quite straightforward and qualifying for an unsecured business loan is no different.

Unsecured lenders are most concerned with:

• The overall health of your business
• Your business and personal credit score
• Consistent annual revenue and cash reserves
• Time in operation

Before applying for any unsecured funding, 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.

While it’s common for lenders to have their own unique list of qualifications, the majority of lenders are interested in the same requirements. 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

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

Online applications typically only ask you to share basic information about your business and the amount of funding you’re looking to receive. Through Fast Capital 360’s simple, online application you can qualify for an unsecured loan online in as little as one hour and can discover each of your options all in one place.

Step 1: Tell us about your business.

Fill out a few basic questions about your business so that we can connect you with the best lenders.

Step 2: Tell us about you.

We need to learn about you so we can determine your eligibility without impacting your credit score.

Step 3: Connect your bank account.

Your revenue data enables us to match you to funding opportunities at the speed of modern business.

Step 4: Get funded.

Funds can be deposited into your bank account as soon as the same day. 

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 is simple.

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

With an unsecured short-term loan, business owners can cover small or immediate expenses without having to disrupt their business’s cash flow. To make this more tangible, let’s take a look at some unsecured loan examples.

Additional Working Capital

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

Emergency Expenses

Unexpected things happen in business just as they do in everyday life. When you need funds as soon as possible, the speed of unsecured financing can quickly address the financial hardships you didn’t see coming.

Growth Opportunity

Sometimes the moment you’ve been hoping for happens when your cash flow isn’t prepared. When your business has a chance to grow, unsecured funds can help you execute and expedite your plans and bring your vision to life.

The Different Types of Unsecured Loans

As you learn about unsecured loans and how each element plays into how much you can get to grow your business, it’s valuable to know the different unsecured loan options available.

Term Business Loans

Unsecured term loans are given to their applicants as a lump sum and are repaid over the course of several 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. Guaranteed short-term loans offer a quick solution to temporary cash flow issues without a long-term commitment.

Business Line of Credit

If you’re looking for short- or long-term financing solutions, an unsecured business line of credit provides small businesses with a more flexible funding option. For example, when you’re starting a project with open-ended costs, an unsecured line of credit for small businesses can provide breathing room and stability when and where you need it.

Inventory Loans

An inventory loan is a type of unsecured loan offered by both online and traditional lenders. While these loans are secured by the inventory being purchased, lending companies often view them as unsecured because if you’re unable to sell the inventory, the lender may not be able to either. Inventory financing is useful when there is an unexpected increase in volume or a delayed shipment leaving your product supply depleted.

Merchant Cash Advances

While it is a form of unsecured funding, a merchant cash advance (MCA) is an advance, not a loan. Unsecured cash advances front your business an agreed-upon lump sum in return for a small percentage of your business’s future revenue.

Emergency Business Loans

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

The Need for Uncollateralized Loans

In 2017, 40 percent of U.S. companies applied for business funding, according to a Federal Reserve Small Business Credit Survey. Of those who applied, only 46 percent actually received the funds they desired—the remaining majority couldn’t provide sufficient collateral to obtain secured financing.

Given 54 percent of businesses were denied the funds they sought in 2017, unsecured loans are an alternative method of financing small businesses should be aware of.

Of course, gaining access to the best non-secured loans necessitates a specific set of business qualifications. Before reviewing the best unsecured loans and what you’ll need to qualify and get one, we’ll explore each element of unsecured financing.

How Do Unsecured Business Loans Work?

Unsecured loans function just like any other loan: you receive cash upfront which is then repaid over an agreed upon term.

Typically, small business lenders require a form of assurance before approving a loan. These are known as “secured” business loans. Here lenders use a business’s assets, such as their business equipment and real estate, to protect themselves from defaults.

With unsecured business lending, however, you’re not providing a physical or liquid asset to obtain financing. Instead, unsecured business finance companies ask that you provide an alternative method of security in order to receive funding, thereby compensating for the risk they’re taking on. Fast Capital 360 has many partners who can provide unsecured business funding. They work hard to find the best unsecured loans for businesses just like yours.

The Difference Between Unsecured & Secured Business Loans

We now know the difference between unsecured and secured loans comes down to collateral. And this difference has a big impact on terms.

For instance, lenders find other ways to ensure their investment will be repaid. Typically, 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 (more on this later). Generally, unsecured loan amounts are larger than their secured counterpart, interest rates are higher and terms are shorter.

To continue evaluating unsecured vs secured loans, let’s further compare and contrast the differences between these two types of funding.

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

Anytime a lender approves a small business loan with no collateral provided they’re taking a risk. Without collateral, they must find other ways to protect themselves.

The Role of Collateral in Secured and Unsecured Loans

Lenders use a business’s assets (like 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 (56 percent) seeking financing were denied access to the funds they were looking for. While insufficient credit history was the primary reason for denial (36 percent), insufficient collateral was right on its heels (35 percent).

Clearly, there are many businesses around the country that have a need for an uncollateralized loan. For example, there are thousands of business owners who’ve decided to lease their business assets rather than purchase them outright. To secure meaningful funding that will allow them to grow, owners need access to no-collateral small business loans. Understanding how to get a small business loan without collateral makes sense for these businesses, as well as new owners, who aren’t in a position to put their possessions on the line.

Knowing how to get a small business loan without collateral may not seem important, but if you lack assets to secure funding, an uncollateralized loan is your best option.

Why Does an Unsecured Loan Have a Higher Interest Rate Than a Secured Loan?

Interest rates on unsecured loans are higher than a secured business loan as unsecured business loan’s lack of collateral pose a greater risk to a lender.

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

For example, if you were to default on unsecured financing, your lender wouldn’t have collateral to seize as a means of making up their losses. Instead, they would recuperate their losses by calling on your personal guarantee or exercising any liens they’ve placed against your business.

The Ways Lenders Eliminate Risk

Despite the fact that the best-unsecured loan rates are reserved for those with excellent credit scores and near-perfect business history, obtaining fast business loans that are unsecured is still possible.

To better understand how unsecured lenders work, you need to recognize how they limit their risks.

Personal Guarantees

Personal guarantees enable you to act as a co-signer to your own business. While this will allow you to get a guaranteed unsecured loan, if your business were to default and be unable to repay the balance of the loan, you, personally, then become responsible for the remaining balance.

Unlimited Personal Guarantees

An unlimited personal guarantee provides your business with the funds you need to grow your company just like a standard personal guarantee.

While you’re still directly responsible for the balance of the unsecured financing if your business is unable to pay, an unlimited personal guarantee means you’re on the line to cover 100 percent of the loan amount in question.

Beyond what this means for your personal savings accounts and family home, a business failure or payment default could trigger your lender to come after any (or all) personal assets you have. This includes your car, life savings, retirement accounts, children’s college savings and—even your spouse’s assets. However, the biggest difference is the variable cost of legal fees accrued by the lender to recoup the full cost of the loan, including interest and legal fees.

Limited Personal Guarantees

Although a guaranteed unsecured loan requires personal assurance to obtain, leveraging a limited personal guarantee places specific parameters on what a lender can recuperate if something were to go wrong with your financing payments.

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.

With a limited personal guarantee a lender can’t recover more than they’re owed. They do, however, have the right to pursue the full amount from any of the parties listed on the guarantee. Depending on the structure of your limited personal guarantees, it’s possible that you or your partner(s) 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 like company machinery, vehicles or personal savings.

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.

The Advantages and Disadvantages of Unsecured Business Funding

Before entering into an unsecured loan agreement, you should look at both the positive and negative sides of the scale,

Advantages

Speed of Funds

Typically, getting an unsecured business loan isn’t as involved or time consuming as other types of business loans. Because many unsecured funding programs are offered through alternative funding companies—like Fast Capital 360, for example—applications are expedited, only requiring a few 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. The simplest comparison in how collateral is used in secured loans vs. unsecured loans is that if you were to 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) cannot be seized without litigation.

Larger Loans Possible

In the right scenario, it’s possible for applicants to get larger loan amounts with an unsecured business loan. This is because secured business loans usually 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.

Of course, that doesn’t mean these options aren’t perfect.

Disadvantages

Higher Interest Rates

Due to the lack of collateral, unsecured loans naturally pose more of a risk to the lenders who issue them. While a personal guarantee is leveraged in the event of default, higher interest rates allow lenders to cover their upfront issuance of the funds to your business by collecting as much money as they can from potentially risky partnerships.

Personal Guarantees

As we reviewed in the The Ways Lenders Eliminate Risk section, 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. In this type of agreement you place a great deal of strain on yourself if things were to go poorly for whatever reason. As we would recommend to any of our own applicants, be sure to only apply for and accept financing programs that you’ll be comfortable and capable of repaying.

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 traditional 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’s not likely 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.

If you have questions about how an unsecured business loan can help your business, get in touch with one of our advisors by calling (800)-735-6107 or chat with us, directly. One of our Business Advisors will help you get a better understanding of how one of these programs can grow your business.