Unsecured Business Loans

unsecured business loans for small business

Updated January 2021

Being a business owner comes with a lot of risks and it takes a lot of dedication to pursue your dream and turn it into a success. But when the time comes for you to apply for a loan to expand your business, there’s one obstacle you might encounter: collateral.

Many lenders require borrowers to put up a valuable asset as collateral. But with all the hard work you’ve already put into your business, it simply might not be possible for your business to own things like real estate or vehicles.

If you need a business loan, but want to avoid having to deal with collateral, one option to consider is an unsecured loan.

What Is an Unsecured Business Loan?

An unsecured business loan is a type of loan that does not require the borrower to put up a major asset, such as real estate, a vehicle, or expensive business equipment as collateral to secure the loan. Business loans that do require the borrower to put up collateral are known as secured loans. It’s important to be aware that if a borrower defaults on an unsecured loan, it is still possible for a lender to seize assets to recover their losses.

Is a Small Business Loan Secured or Unsecured?

A small business loan could be either secured or unsecured. If you have to provide a form of collateral for a loan, it is a secured business loan. If you don’t have to provide collateral, your loan is unsecured. Some types of loans are always secured, including equipment financing and commercial mortgages. Other types of loans are nearly always unsecured, such as a line of credit.

Unsecured Business Loan Options

Term Loan

Term loans are “regular business loans.” That is, your business is loaned a set amount of capital with a fixed repayment period and monthly payments. Short-term loans, such as working capital loans, and long-term loans, such as business expansion loans, are both types of term loans. Term loans are available through traditional banks, credit unions, alternative lenders, and online lenders.

The benefit of an unsecured term loan is you can usually use the capital to meet any of your business needs. If you are trying to boost cash flow during a seasonal slump, a working capital loan can help. If you are looking to expand and grow your business, a long-term loan might be best.

The downside of an unsecured loan is that you will have fixed repayment amounts until you pay off the full loan amount, plus interest. If your business revenue fluctuates or you haven’t been in business long enough to know your usual cash flow, a term loan can be risky. Be sure to understand the repayment terms before taking an unsecured term loan.

Merchant Cash Advance

A merchant cash advance (MCA) is a lump sum of capital provided in exchange for a portion of future debit and credit card sales. This can be a good option if you have unstable revenue and want to minimize future debt obligations during slow business months.

On the other hand, merchant cash advances typically take a significant chunk of cash from your future sales until you pay off the advance, plus interest. Be sure that you are aware of how much money a merchant cash advance will be taking out of your sales to avoid future surprises.

Business Line of Credit

A business line of credit works just like a credit card: a lender provides a credit limit for business funding, and you use as much or as little as you choose. In addition, you only pay interest on the funds that you use. A business line of credit can be a great unsecured financing option if you have a recurring need for extra capital or aren’t sure how much capital you will need. A line of credit may have a higher interest rate than other financing options, so be sure you are aware of the interest rate before applying for a line of credit.

SBA Loans

SBA loans are one of the most coveted loan options because they offer low interest rates with long repayment terms. You may be able to get a loan from the Small Business Administration without collateral if you do not have many business assets. Still, you will almost certainly be required to guarantee the loan with your personal assets. The SBA has strict requirements for borrowers, but you can still qualify for an SBA loan if you don’t have business assets to offer as collateral. Talk to your lender if you are interested in an SBA loan without collateral requirements to learn more about your options.

Personal Loans

Personal loans can be an option for a flexible, unsecured loan used to cover startup costs or other business needs. However, personal loans are tied to your assets and could put them, or your savings, at risk if you default on the loan. Personal loans also may be smaller than business loan options. If you are confident in your ability to repay the loan, personal loans can be a great alternative when business loans are not an option for you.

Pros and Cons of Unsecured Business Loans

Unsecured business loans can be particularly appealing to small business owners who simply might not be able to own the types of assets banks look for to be used as collateral. If the business owner has personal assets that could potentially be used for collateral, they might not be comfortable with the idea of risking personal assets to fund business ventures.

Since unsecured business loans involve a higher risk for the lender, lenders place a great deal of emphasis on credit scores when evaluating loan applications.

Because of this, it can be difficult for business owners with bad credit scores to obtain an unsecured business loan. The minimum credit score requirements for many unsecured business loans make them unobtainable for any business without good credit.  Given the higher risk that comes with offering unsecured business loans, interest rates can also be higher than they would be with secured loans.

Although unsecured business loans are riskier for the lender, the approval time can actually be shorter than it is for secured loans. When a loan is secured by collateral, the asset needs to be appraised to determine its value, but there’s no need for that step when collateral is not involved.

Assets and Unsecured Loans

Just because a loan is unsecured, that doesn’t mean lenders are powerless to collect if a borrower defaults on the loan. There are a few different types of unsecured business loans: blanket business lien, unlimited personal guarantee, and limited personal guarantee.

If an unsecured business loan has a blanket business lien, the lender is able to seize and sell assets belonging to a business to recover their losses. A personal guarantee means the lender can come after assets belonging to the individual borrower, not the business, to recoup their losses.

With an unlimited personal guarantee, the lender can come after any of the borrower’s personal assets to recover the amount they’re owed, plus interest and any legal fees they incur in the process.

Limited personal guarantees are primarily used by businesses that have multiple partners and there are two types of limited guarantees: several guarantees and joint and several guarantees.

With a several guarantee, each partner is liable for a set percentage of the amount owed. In the case of a joint and several guarantee, a lender can try to recover losses from all of the business partners or any individual partner, meaning it is possible for one partner to be liable for the full amount owed.

There are other types of business funding options that typically do not require the borrower to put up extra collateral. With invoice financing and equipment financing, the deals are respectively secured by the invoices and equipment, so the borrower does not have to put up anything else.

Applying for an Unsecured Business Loan

Since an unsecured business loan involves a higher risk on the lender’s behalf, lenders put a great deal of emphasis on creditworthiness and business performance. All lenders have their own criteria they look for, but they typically consider things like how long a business has been operating for, business revenue, credit score, and your business plan.

During the loan application process, lenders may ask you to provide information about both your personal and business financial history. This includes:

  • Personal credit score and credit history
  • Business credit score and history
  • Monthly or annual revenue and other financial information
  • Business plan
  • Identification documents