Are you looking for small business financing that doesn’t require you to put up business-owned assets as collateral? An unsecured loan could be the ideal solution for you. While you may pay more for unsecured loans than for secured funds, it can get you the money you need to get through an emergency or take advantage of an immediate opportunity, even if you have Don’t be collateral to pay back the money.
In this article, I will explain what you need to know Determine Whether An Unsecured Business Loan Is The Right Solution for you and find out what type of funding is ideal for your situation.
What are unsecured business loans?
Unsecured business loans are a form of financing that does not require personal or business collateral, such as business equipment, inventory, vehicles or real estate, in order for you to be approved for the money. (Collateral can be anything of value that can be quickly sold and turned into cash.) secured business loansIn contrast, it requires that you mortgage assets that your lender can take and sell if you fail to make loan payments as stipulated by your lending company.
Be aware that even though unsecured financing doesn’t require physical collateral, that doesn’t mean you won’t be held liable if you can’t repay it. If you default on the financing, your lender can sue you. Another form of recourse lenders have is the Uniform Commercial Code (UCC) lien if you fail to repay the loan. a ucc lien Gives a lender the right to seize business assets if you fail to repay your loan. Lenders can file a UCC lien with your state’s secretary of state’s office after you sign your loan agreement. Your lender can file a lien on specific assets or a broad lien, which allows them to take any business assets necessary to make up for the loss.
How do unsecured business loans work?
Unsecured business loans work like other types of financing. You apply for them, typically submitting a business plan, bank statements, tax returns and other documents to potential business lenders to determine your creditworthiness. (The loan application process Rates will vary based on loan type and lender. Application and underwriting processes are more rigorous than traditional banks online lenders.Potential lenders check your personal credit score, business credit history, annual company revenue, and other factors related to your personal and business finances. If approved, you get a lump sum amount or the amount you can borrow against. Finally, you make monthly payments to repay what you’ve borrowed.
You’ll usually get faster financing with unsecured business loans than with secured loans. This is because the lender is not required to verify the value of your collateral. Because they are not backed by collateral, they are riskier to lenders. This is why unsecured loans usually come with higher interest rates, less favorable repayment terms, and require personal guarantees.
Advantages and Disadvantages of Unsecured Business Loans
Pros: Unsecured small business financing is attractive because:
- Applications can usually be processed quickly.
- Funding is also relatively fast.
- You can still get financing if your business doesn’t have valuable physical assets to put up as collateral, which is often the case with startups and other new businesses.
Shortcoming: The negatives of unsecured business loans include:
- They usually come with higher annual percentage rates (APRs) than loans backed by collateral.
- You may have to obtain funds from less reputable providers than traditional financial institutions.
- You’ll probably have to provide a personal guarantee, which puts your assets at risk, or a business lien, which allows a lender to seize the value of your business.
How to get unsecured business financing
You may be able to get unsecured business loans from both traditional financial institutions (less likely), such as banks and credit unions, and online and alternative lenders (more likely).
To qualify for an unsecured loan from a bank, you’ll need to have been in business for several years, have solid personal credit, excellent annual business revenue and good cash flow. In comparison, online lenders may have more flexible qualifications and be faster to fund.
Government-backed Small Business Administration loan (sba loan), a loan program offered through banks and other SBA-approved lenders like the popular SBA (7), may not require collateral if they are under $25,000. Collateral is usually required for larger loan amounts. Most SBA financing requires an unlimited personal guarantee from someone who owns more than 20 percent of the company.
unsecured business loan options
Here are some of the most popular types of unsecured loans and what they can be used for:
- business credit card. A bank or credit card issuer issues an approved credit limit not backed by collateral. Interest rates on business credit cards can be relatively high. They are ideal for paying everyday business expenses to separate them from personal ones, which is especially valuable at tax time. Be sure to pay off your business cards promptly so that the interest doesn’t add up.
- Signature Loan. If you have a good relationship with your local bank or credit union, you may be approved for this type of business loan, which is an unsecured, no-collateral loan. It is based on a good faith assessment of the borrower’s creditworthiness and his promise to repay the money. This type of term loan can be used for almost any purpose, but is usually for a relatively small amount.
- Short Term Loans, Some short-term loans do not require collateral. Traditional lenders usually do this, while online lenders may not. Similar to a signature loan, the money can be used as working capital, to improve business cash flow, and for other purposes, but is usually only approved for relatively small amounts, usually Under $25,000. unsecured short term loan Usually come with higher interest rates and shorter loan terms than secured ones. Having collateral will get you lower interest rates. In most cases, business owners with low credit scores will not be eligible for unsecured term loans.
- business line of credit, This type of financing provides a set amount of money that companies can borrow on an as-needed basis. It only needs to be paid back when the cash is used. Business credit lines are typically used to cover unexpected and recurring seasonal expenses. They come with relatively easy eligibility requirements as compared to other funding options.
unsecured business loan options
Unsecured financing options are available beyond the loan products in the previous section. They usually have less favorable terms, but may be considered depending on your business needs.
- invoice factoring Lets you sell your outstanding invoices and get cash in return. The online application process is relatively easy, and factoring is well suited for fast funding if you need emergency cash. (Funds can be deposited into your business checking account or bank account in as little as one business day.) Factoring companies typically don’t set a minimum credit score to qualify. However, they may want to check to see if you have established invoicing and accounting practices and may need some time in business. However, you will not need to provide a personal guarantee because you are selling an asset – your outstanding accounts receivable – to the factoring company.
- invoice financing Allows you to use your unpaid invoices to get cash advances. In this case, the value of those outstanding invoices serves as collateral, so the business owner doesn’t have to hold any other assets to back them. Qualifying for invoice financing is relatively easy. However, you should be aware that you will end up paying very high rates of interest on these loans.
- merchant cash advance Generally easier to qualify for than business loans. They come with no credit score requirements. With an MCA, a lender lends you cash based on your recent sales, and you repay them with a portion of your future sales. However, this type of financing is risky and expensive, and should be considered as an option of last resort. It is often the only type of funding available to new entrepreneurs running a startup.
Unsecured Business Loans: The Bottom Line
For business owners who do not have business collateral to back the loan, unsecured business financing may be the best option for small business loans available to them. Others have a choice between secured and unsecured loans. Either way, it is essential to know that unsecured financing can cost you a lot in interest and hidden charges such as upfront costs, origination fees and prepayment penalties. Lenders must charge more to cover the risk of lending money without collateral to back the loan. And, if you don’t pay back unsecured financing, you can still lose personal and business assets to your loan company.
Weigh your options carefully to determine if an unsecured business loan is the right funding option for you.