a woman applying for unsecured loans

Unsecured Business Loan: A Guide to Borrowing Without Collateral

Ezra Cabrera | January 18, 2023

Contents

    An unsecured business loan can be a great way to get the capital resources your business needs. But before you make any financial decisions, it's important to understand what an unsecured loan is, how it works, and its pros and cons.

    In this guide, we'll break down everything you need to know about unsecured small business loans—from eligibility criteria and repayment terms to best practices for choosing the right lender. Read on to learn more.

    Key Takeaways

    • Borrowers don’t need to pledge collateral to qualify for an unsecured loan. But this doesn’t mean they’re off the hook if they default on the loan because most lenders still require a UCC lien or a personal guarantee.

    • There are different types of unsecured loans, but the most common ones are business lines of credit, business credit cards, term loans, merchant cash advances, invoice financing, and microloans.

    • You can get an unsecured loan from banks, but they’re often offered by online lending companies.

    What is an Unsecured Business Loan?

    Unsecured business loans don’t require collateral to secure a loan. However, this doesn’t mean you won’t be liable if you can’t repay the loan because most lenders ask for a UCC lien or a personal guarantee.

    A UCC lien gives lenders the legal right to seize your assets in case of a loan default. They can either file a lien on specific assets or a blanket lien, allowing them to take any assets necessary to cover the cost of the loan.

    Personal guarantees hold you accountable for the debt if you’re unable to make payments, and your lender also has the right to repossess your personal assets to recoup their losses.  

    What are the Best Unsecured Business Loans for You?

    There are several types of unsecured business loans you can choose from. Here are some of the most popular options among small business owners:

    A Business Line of Credit

    A business line of credit gives you access to a predetermined credit limit from which you can borrow money as needed, given that you don’t exceed the limit. Like credit cards, you only need to pay interest on the borrowed amount. You can use the funds for emergency expenses or support long-term growth.

    Business Credit Cards

    Most credit card companies offer business credit cards that you can use for almost any business expense. You can earn points for making certain purchases like personal credit cards, but business credit cards have higher credit limits and more favorable terms.

    Unsecured Term Loans

    An unsecured term loan is a lump sum of money you borrow from a lender to be repaid within a specific period, usually within one to five years. These loans are often used for long-term investments, such as equipment, real estate purchases, or business expansion.

    Merchant Cash Advance

    A merchant cash advance funds your business based on future credit card sales. You can repay the loan using a percentage of your card sales minus a fee until your loan is paid back in full. A short-term loan usually charges high-interest rates, so they’re often used as a last resort for businesses seeking funding.

    Microloans

    Microloans are small loans specifically designed for startups and small businesses. These often come with low-interest rates and flexible payment terms but lower loan amounts of up to $50,000.

    Invoice Financing

    Invoice financing allows you to sell outstanding invoices to lenders at a discount in exchange for money upfront. Lenders typically advance up to 95% of the total invoice value. You’ll receive the remaining percentage, minus a fee, once your customers pay their dues to the lender.

    What are the Eligibility Criteria for Unsecured Business Loans?

    The eligibility criteria for unsecured business loans vary depending on the lender and the loan product. But most lenders consider the following:

    Time in business: Most lenders prefer companies operating for at least two years.

    Revenue: The minimum monthly revenue requirement may vary depending on the lender you’re working with.

    Credit score: Your credit history is one of the major factors lenders consider when it comes to unsecured loans. The rule of thumb is that the higher the credit score, the better your chances of approval.

    Financial statements: To assess your business’ financial health, lenders may ask you to submit your balance sheet, profit and loss statement, and income statement.

    Business plan: Some lenders may require a business plan outlining your goals, strategies, and projections.

    It’s worth noting that some lenders may have different or more specific criteria, so it’s best to check with your lender before applying.

    What are the Pros of Unsecured Business Financing?

    Here are some advantages of unsecured business loans:

    No collateral needed: Not having to put up any assets to secure the loan can be beneficial for businesses that don’t have any collateral available or don’t want to risk losing them in case of a default.

    Simple application process: The application process for unsecured business loans is quicker and simpler than for secured loans, especially if you work with alternative lenders. This makes it easier for you to access the funds you need when you need them.

    Flexibility: You can use the funds for various purposes, such as working capital, equipment purchases, or expansion, giving you the flexibility you need to grow your business.

    Larger loan amounts: Some unsecured business loans provide larger loan amounts than other funding options like credit cards or personal loans.

    What are the Cons of Unsecured Business Loans?

    Here are some disadvantages of unsecured business loans:

    Higher interest rates: Borrowers often pay more interest over the life of the loan since lenders charge a higher interest rate for unsecured loans.

    Short repayment terms: Unsecured loans have shorter repayment terms, so you might have to pay off the loan faster than secured loans.

    Strict credit requirements: Lenders primarily rely on your creditworthiness when evaluating unsecured loan applications, so you’ll likely need good credit to qualify.

    Where Can You Apply for Unsecured Financing?

    You can apply for unsecured financing through banks and online lenders. However, online lenders usually offer this type of financing since banks often ask borrowers for collateral.

    Alternative lenders like SMB Compass offer a quick and simple application process. Here’s how to apply for unsecured financing:

    1. Fill out an online application form. Most lenders offer a free application that will not affect your credit score.
    2. After reviewing your application, a financial professional will reach out to you to discuss your options.
    3. Receive loan offers from lenders and fund your business.

    When is the Best Time to Get an Unsecured Loan?

    You might want to consider unsecured loans if…

    You do not have assets to put up as collateral. This is an excellent option if you don’t have any valuable assets to put up as collateral or don’t want to risk losing them in case of a default.

    You have short-term financing needs. Consider applying for unsecured loans if you prefer short-term loans to fund short-term projects or expenses.

    You have good credit. Unsecured business financing has stricter credit requirements than secured loans, so they’re best for business owners with a high personal credit score.

    You need a smaller loan amount. Unsecured loans offer lower loan amounts than secured loans, making it an excellent option if you prefer to take out smaller loan amounts.

    It’s important to note that these are general guidelines, and not all businesses may fit into these criteria. Every business is unique and specific requirements for unsecured business loans may vary depending on the lender and loan amount.

    Is an Unsecured Business Loan the Right for You?

    An unsecured loan offers a great opportunity for small businesses if used smartly. As with any loan, it’s important to carefully review the terms, rates, and fees before signing on the dotted line. After reviewing your specific needs and budget, you should now have a better understanding of what type of unsecured loan best serves your business.

    To help ensure success moving forward with this type of loan, we highly recommend speaking to a financial advisor or investment professional before making any major decisions. The right professional will help you secure the best possible offers and learn how to utilize those funds wisely -- using their experience and perspective on the current market trends. After all, many options are available when deciding whether or not an unsecured loan best fits your overall financial goals or limitations.

    Frequently Asked Questions

    What are the requirements for getting an unsecured business loan?

    The requirements for an unsecured loan can vary depending on the lender and loan product. With SMB Compass, we usually ask for a credit score of at least 600, a minimum of 2 years in business, three to six months’ worth of bank statements, and your online application.

    How much can I borrow with an unsecured loan?

    The amount you can borrow with an unsecured loan depends on the loan product and the lender you’re working with. However, it’s generally lower than the amount you can get from a secured loan.

    How long does it take to get an unsecured loan?

    The time it takes to receive an unsecured loan varies depending on the lender and loan product, but it usually takes 24 to 48 hours if you apply through alternative lenders.

    What is the interest rate on an unsecured loan?

    The interest rates for unsecured business loans are based on your creditworthiness, the lender you’re working with, and the loan product. However, interest rates for unsecured financing are generally higher than for secured financing.

    How can I use an unsecured business loan?

    You can use an unsecured loan for almost any business purpose, including equipment purchases, payroll, inventory, expansion, and more.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.