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What You Need to Know About Unsecured Business Loans

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Rapid Finance

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As a small business owner, you may need financing at some point. You might need help purchasing an asset, expanding your business and more. No matter the reason, an unsecured business loan can help.

Whether you’re struggling due to the COVID-19 pandemic or are looking for help with business needs to expand, there are unsecured business loan options out there.

Let’s take a closer look at this funding option and how it could help your business.


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What is an unsecured business loan?

An unsecured business loan is commercial financing without putting up any collateral. Without using collateral, the loan application is evaluated based on the the business’ proven track record along with your creditworthiness.

The business can use the funds from an unsecured business loan to support the operations of the business.

Is collateral needed for an unsecured business loan?

With secured business loans, the business needs to provide some type of business asset as collateral for the loan. If the business were to default on a secured loan, the lender could sell the collateral assets to recoup their losses. A few examples of collateral could be the business’ property, business bank accounts or heavy equipment.

When you apply for an unsecured business loan, the business will not be expected to put down collateral. With that, you will not need to provide an asset for the lender to consider as collateral.

Without the burden of providing collateral, unsecured business loans provide an opportunity for businesses to meet their funding needs. A business can obtain the funding it needs without putting its assets on the line.

What are the benefits of an unsecured business loan?

The major benefit of an unsecured business loan is that the business will not need to provide collateral for the loan. Many businesses simply do not have large business assets that could serve as collateral for a loan.

Without the added hurdle of providing collateral, the unsecured business loan process is typically quick. Additionally, it can be easier to qualify for these more flexible loans.

What are the drawbacks of an unsecured business loan?

When applying for an unsecured business loan, some funders do require a personal guarantee. With a personal guarantee, the business owner is personally promising to repay the loan, with personal funds, in the event the business defaults on the loan. If this were to happen, it could significantly damage your credit score.

Certain lenders may require a personal guarantee. If you aren’t willing to make that commitment, then don’t feel obligated to sign on the dotted line. Although your business may need the funds, you may not want to put your personal assets in danger.

Another drawback of an unsecured business loan includes generally higher rates or fees. This is because the lender is taking on more risk by providing a loan without any collateral as guarantee. With a higher risk for the lender, the loan terms will likely include a higher rate or fee.



Types of unsecured business loans

Here are a few unsecured business loan options to explore:

Small business loan

If you need a lump sum of cash to fund your business needs, a small business loan could be helpful. With a variety of loan terms, you can apply for a timeline that suits your business needs. Plus, you can seek out repayment plans that work with your cash flow.

Depending on your business, you could have access to a high dollar loan amount. But be wary of the rates and fees that could affect the total cost of the loan.

Line of credit

If you need cash to fund predictable needs, a line of credit could be a good solution. The best part about a line of credit is that you only have to take out what you need. When you pull funds from the line of credit, then you can start your repayment plan. This could be useful for long-term spending needs that you foresee happening on a regular basis.

Although there are other unsecured financing options out there for your small business, these two options are a great place to get started.


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How to qualify for an unsecured business loan

If you are interested in applying for an unsecured business loan, then take a minute to understand the qualifications.

Here are a few things that a lender will consider:

  • Business income. If you are applying for a business loan, it is important that you can provide a record of past business income. In most cases, you’ll need a sizable business income to qualify for a loan.
  • Credit history. A lender will consider your business’ credit history. The exact credit requirement for a loan will vary based on the lender.
  • A plan for the funds. Most lenders will want to know how you’re going to use the funds to improve your business.
  • Age of the business. How long you’ve been in business will be taken into account throughout the loan process. If your business is relatively young, then you may have a more difficult time securing financing.

As you move forward with the application process, consider these factors. You will want to maximize the potential for a successful application by improving these areas of your business.

Are there unsecured business loans for bad credit?

As you noticed, lenders will consider your credit history as a part of your application. Although it can be more challenging to obtain a business loan with bad credit, it is possible. If you have an established business with many years of stable annual revenue, then a bad credit score might not be a major impediment.

If you don’t have a long business history, consider seeking out a co-signer who is willing to take responsibility for the loan. With a co-signer, you may be able to obtain financing without a great credit score.

There are unsecured loan options for businesses with bad credit. Some of the most common loan types offered to small businesses with bad credit include short-term loans, short-term lines of credit and working capital loans. But you’ll need to seek out small business lenders that are willing to work with your credit range that provide a loan that is well suited for your small business.

The bottom line

It is possible to obtain unsecured small business loans. Like with any financing opportunity, it’s always important to understand the fine print to make the best decision for your business.

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