How Unsecured Business Loans Work

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Most lenders require business owners to pledge collateral to secure a loan. If your business doesn’t have enough assets to back up the loan, you may be forced to use your personal assets. However, risking your car or house may not be the best solution. Luckily, you can tap into unsecured business loans to finance your business needs.

In this post, we’ll discuss unsecured business loans, how they differ from secured loans, the pros and cons, and the available options. You’ll also learn what you need to qualify for an unsecured loan and where to get one.

Find The Best Loan For Your Small Business

Get funding in as little as 24 hours. See your prequalified offers by filling out a quick online form. No industry excluded. SBA financing is available.

What is an Unsecured Business Loan?

An unsecured business loan is a loan that doesn’t require any form of collateral like equipment, inventory, or real estate to secure funding. Lenders often issue this type of loan using the borrower’s creditworthiness rather than collateral. 

However, some lenders may still require a personal guarantee or a UCC lien. When you sign a personal guarantee, you agree to use your personal assets as collateral. A UCC lien gives the lender the right to seize your business assets if you can’t repay the loan.

Typically, getting approved for an unsecured loan is hard because lenders rely on your creditworthiness. But if you have a strong credit history and a steady income stream, qualifying for an unsecured business loan shouldn’t be something to worry about. 

How Is an Unsecured Business Loan Different from a Secured One?

As mentioned before, unsecured business loans allow you to borrow money without having to pledge collateral. On the other hand, secured business loans require you to put up collateral to get the funding. If your business is unable to repay the loan, the lender will seize your valuable assets to recoup the losses. Generally speaking, secured business loans are riskier than no collateral loans because you have something to lose if you default. 

Another difference is that lenders are more willing to loan secured loans because of the collateral pledged as “security.” Plus, you may qualify for larger amounts than you would if you apply for unsecured business financing.

Pros of Unsecured Business Loans

Tapping into unsecured small business loans has several benefits, including:

Quicker Access to Cash

Unlike secured loans, such as SBA loans that take a month or longer, unsecured financing has a short approval process. This means you can access the funding you need faster to cover your business expenses.

Shorter Process and Approval

Since unsecured business funding doesn’t require collateral, lenders do not need an appraisal as part of the application process. This translates to a faster application and approval process compared to secured financing options.

No Collateral Needed

Unlike other forms of business financing, you don’t need to pledge collateral to qualify for an unsecured business loan. This makes unsecured loans the best financing option for startups and small business owners with insufficient physical assets to back up the loan.

No Risk of Collateral Loss

Because you don’t need to put up any form of collateral, there’s no risk of losing physical assets if your business cannot repay the loan. 

Cons of Unsecured Business Loans

As with any other form of business financing, unsecured business loans have drawbacks.

Find The Best Loan For Your Small Business

Get funding in as little as 24 hours. See your prequalified offers by filling out a quick online form. No industry excluded. SBA financing is available.

Higher Interest Rates

Since unsecured business loans do not require collateral, they typically come with high-interest rates. As a result, lenders charge high rates to lower their lending risk in case the borrower defaults on the loan.

Smaller Loan Amounts

Unsecured small business loans present more risk to lenders because they don’t have anything to seize if a borrower defaults on monthly payments. For this reason, they offer smaller loan amounts than collateral loans.

Harder to Qualify For

Due to the risk posed by unsecured loans, lenders put in place strict eligibility requirements. Unfortunately, this means it can be hard to qualify for, especially if your business has a bad credit score, unreliable income stream, or low debt-to-income ratio.

Personal Guarantee

Some lenders may require a personal guarantee, meaning you may be forced to repay the loan using your personal assets if the business cannot.

Defaulting on Your Loan Can Damage Your Credit

If you default on unsecured funding, your credit score can take a major hit. This may lower your financing options and approval odds for future loan applications. 

Common Types of Unsecured Loans

There are different types of unsecured business loans, each with pros and cons—understanding how each work will help you decide on a good option for your business needs.

Term Loans

Term loans are a financing option that provides borrowers with a lump sum amount of money, repaid over a set period of time at regular intervals. This type of unsecured loan is ideal for business owners needing a lump sum amount of cash.

Business Line of Credit

Unlike term loans that give you access to a lump sum at a go, business lines of credit allow you to access cash on an as-needed basis up to a predetermined amount. With a business line of credit, you’ll only need to pay interest on what you draw and borrow again once you pay it off. Business lines of credit are a suitable funding solution for businesses that require quick access to funds for recurring expenses.

Merchant Cash Advance

A merchant cash advance (MCA) allows you to borrow a lump sum of cash against your future business sales. The funds from an MCA aren’t considered a loan but rather a cash advance based on the volume of credit card receipts. MCAs are ideal for businesses that require fast cash and have a huge volume of credit card sales.

Invoice Factoring

Invoice factoring lets you sell your outstanding invoices at a discount to an invoice factoring company and, in exchange, get a lump sum of money. The factoring company is responsible for collecting the payments, usually in 30 to 90 days.

How Do You Typically Qualify for an Unsecured Business Loan?

The requirements for an unsecured business loan vary depending on the lender. Generally, here’s what most lenders require when evaluating your eligibility.

  • Good credit score
  • Established repayment history
  • Low debt-to-income (DTI) ratio
  • Strong business revenue

As mentioned before, qualifying for a no-collateral loan is difficult, especially if you’re applying through a bank. However, it may be easier to get approved for an unsecured loan when you consider alternative options like online lenders.

Where to Get Unsecured Business Loans

You can easily get unsecured business loans through online lenders like Biz2Credit. Biz2Credit offers three funding solutions to businesses:

  • Working Capital: You can borrow $25,000 to $2 million to cover your everyday operations. If approved, you can get the funding in 24 hours or less and pay it back using your business receipts.
  • Term Loan: Loan amounts range between $25,000 to $500,000, and you can get approved in as little as 72 hours. Interest rates start from 7.99% but may vary depending on your credit score and other factors. Repayment terms for a term loan are 12 to 13 months.
  • Commercial Real Estate Loan: You can qualify anywhere between $250,000 to $6 million in 48 hours and use the funds to finance your commercial real estate needs. Like term loans, repayment terms range from 12 to 36 months.

Navigate Biz2Credit’s website to submit a request for funding approval in as little as 24 hours.

Biz2Credit

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