Flexible Financing: The Top Unsecured Business Loans

woman with colleagues in a business district

In the realm of business financing, unsecured business loans offer companies an avenue to obtain necessary capital without the need to offer collateral—an asset that the lender may seize if repayment falters. Yet, the absence of collateral does not absolve borrowers entirely of responsibility.

Given the lack of collateral, it’s common for lenders to request a personal guarantee from borrowers. This legally binding commitment mandates that should the business fall short in repaying the loan, the borrower is obligated to cover the debt using their personal resources.

Upon complete repayment of the loan, this personal guarantee is subsequently lifted.

What is an Unsecured Business Loan?

Within the framework of business finance, unsecured business loans stand out as a unique form of lending that doesn’t necessitate the provision of tangible collateral, such as company machinery, stock, or property, as a guarantee for obtaining funds.

However, the absence of tangible collateral doesn’t imply a total relief from repayment responsibilities: these loans are frequently underpinned by either a personal assurance or a UCC lien.

A personal assurance means that in situations where the business fails to settle its debt, you, as the borrower, are held individually accountable. The lender then has the authority to claim your personal belongings to offset any financial losses due to default.

On the other hand, a UCC lien empowers the lender to confiscate specific business assets if loan repayment is not met. After formalizing the loan contract, such liens are commonly registered with the secretary of state’s office.

Depending on the lender’s strategy and discretion, a lien might be placed on certain designated assets or a comprehensive blanket lien might be imposed, granting the lender the latitude to claim whichever business assets are deemed necessary to balance their financial losses.

How Do Unsecured Business Loans Function?

In the business financing landscape, unsecured business loans operate similarly to most debt financing mechanisms. The process involves applying for the loan, acquiring the funds, and then gradually repaying the borrowed amount along with the interest.

The absence of collateral expedites the funding process of unsecured business loans compared to their secured counterparts, since there’s no need for the lender to assess the worth of your assets.

Nonetheless, this lack of collateral introduces a higher level of risk for lenders. As a result, unsecured loans often carry steeper interest rates and typically necessitate a personal guarantee from the borrower.

Types of Unsecured Business Financing

The domain of unsecured business financing encompasses a diverse range of options, such as:

  • Term Loans: When visualizing a standard business loan, term loans often come to mind. They represent a fixed amount of capital loaned by a provider, which businesses repay within a predetermined duration. They’re ideal when there’s a specific business need, be it an investment or a particular purchase;
  • Business Credit Lines: Such credit facilities offer versatility in financing. Businesses are given a ceiling up to which they can borrow and are charged interest solely on the drawn amount. After repayment, businesses can once again access the funds. Unsecured lines of credit serve multiple purposes, from managing working capital to addressing immediate financial obligations. Additionally, they act as a financial safety net during unforeseen circumstances;
  • Invoice Financing: This financing mechanism allows businesses to convert their outstanding invoices into immediate capital. The firm that purchases the invoices, or the factoring company, subsequently manages the collection process from clients. While these entities might examine your invoicing history and business tenure, a personal guarantee might not always be mandatory, given that you’re essentially trading an existing asset;
  • Merchant Cash Advances (MCAs): In this arrangement, providers offer upfront cash based on a business’s sales projections. Businesses, in return, allocate a segment of their ensuing sales to the lender as repayment. MCAs have a comparatively straightforward qualification process, but they are high-risk and can be costly. Thus, they should be considered when other avenues are not viable.

Unsecured Business Loans: Advantages and Drawbacks

woman with colleagues consulting a client at the Business Loan office

Pros:

  • Promptness. Application procedures tend to be swift;
  • Absence of Collateral. Businesses lacking significant tangible assets can still secure funding;
  • Flexible Eligibility. Certain lenders extend unsecured loans even to fledgling businesses or those with credit challenges.

Cons: 

  • Higher Costs. Typically, the APRs for unsecured loans are steeper compared to secured loans;
  • Potential Risk to Assets. Borrowers may need to endorse a personal guarantee, endangering personal assets, or a business lien might be enforced, permitting lenders to claim available business assets;
  • Less Favorable Conditions. Lenders view unsecured loans as higher risk, leading to relatively reduced loan amounts and condensed repayment timeframes in comparison to secured options;
  • Challenging Access to Premium Choices. While some lending entities might adopt a more lenient approach, traditional institutions like banks usually impose rigorous standards. Optimal unsecured loan terms often demand robust financial records and commendable credit ratings.

Acquiring an Unsecured Business Loan

Unsecured business loans can be procured from conventional banking institutions, such as banks and credit unions, as well as digital lending platforms.

When seeking an unsecured loan through a traditional bank, the prerequisites often encompass having a longstanding business history, robust personal credit, and substantial annual turnover. Conversely, digital lenders might provide more accommodating criteria and expedite the funding process.

For those considering the government-supported SBA 7(a) loans, offered through various financial institutions, collateral may not be mandatory for loans under $50,000. However, a boundless personal guarantee is requisite for stakeholders holding over 20% of the business.

It’s commonplace for lenders to scrutinize your personal credit standing when you venture into acquiring a collateral-free business loan. Additionally, they’ll weigh factors such as the duration your business has been operational and its annual revenue.

Finding Unsecured Business Loans

Traditional financial institutions such as banks and credit unions are familiar avenues to seek unsecured business loans. Yet, the modern era has seen a surge in offerings from online lenders and alternative financing platforms.

A notable entrant in this sector is the fintech industry, which blends finance and technology. These fintech entities often deploy diverse criteria to evaluate loan eligibility, broadening the access window for potential borrowers.

Choosing Between Secured and Unsecured Business Financing

When diving into the world of business financing, it’s vital to gauge the appropriateness of both unsecured and secured loan options. An unsecured business loan might be the route to take if:

  • You lack substantial assets to offer as collateral;
  • You prioritize quicker access to funds over longer, potentially cumbersome processes associated with secured alternatives.

However, a word of caution: unsecured loans might come bundled with elevated annual percentage rates (APRs) and might offer less leniency in repayment structures. If you’re in a position to provide collateral and can secure advantageous interest rates, pivoting towards a secured loan could be the smarter financial decision.

Alternatives to Unsecured Business Loans

Should you reckon that an unsecured business loan might not be the optimal solution for your enterprise, ponder over the following alternatives:

  • Business Credit Cards: For startups or businesses with a limited operational history hindering their eligibility for online loans, business credit cards can be a viable option. They proffer malleable, uncollateralized funding suitable for daily expenditures or sizable acquisitions, depending on your credit threshold. Nevertheless, a personal guarantee might still be a prerequisite;
  • Small Business Grants: Opting for small business grants can be advantageous for those desiring to sidestep accumulating debt or those still not qualifying for cost-effective funding. While scouting and applying for the apt grant might consume time, the reward is access to non-repayable financial resources;
  • Crowdfunding: For businesses not fitting the mold of conventional loan stipulations, crowdfunding emerges as a noteworthy consideration. By establishing a business portfolio on platforms like Kickstarter, businesses can set funding targets and rally financial support from the general populace. As a general practice, backers are given incentives or equity in reciprocation for their contributions. This mode proves especially fruitful for merchandise-centric businesses boasting an online presence.
woman with colleagues in a business district with a bank

Top Ratings for Unsecured Business Loans

COMPANYLOAN AMOUNTSAPRTIME IN BUSINESSMINIMUM CREDIT SCORE
OnDeck$5,000 to $250,000Not disclosed1 year625
BlueVine$6,000 to $250,000Not disclosed2 years (Flex 6 plan)625
National Funding$10,000 to $500,000Buy rates start at 1.11%6 months600
Fundbox$1,000 to $150,000Start at 4.66%6 months600
TD Bank$10,000 to $5 millionNot disclosed1 year660
Biz2Credit$25,000 to $6 millionAs low as 7.99%6 months600
Rapid Finance$5,000 to $1 millionNot disclosed6 months550

Guidelines for Assessing Unsecured Business Loans

Understanding which financing solution best aligns with your business’s distinct needs is imperative. Initiate this process by determining the purpose of the loan, the precise amount required, and an assessment of the applicant’s credit profile.

Keeping these considerations in mind, weigh the following elements when analyzing unsecured business loans:

  • Qualification Standards. While lending entities employ diverse criteria to assess potential borrowers, a common benchmark is a personal credit score of at least 680. Moreover, lenders often peruse the business’s financial statements to gauge the aspirant’s repayment capabilities;
  • Variety of Loan Options. The business financing domain offers a plethora of loan categories, each tailored to cater to specific needs. Contemplate if your business requires a one-time lump sum or desires the flexibility of withdrawals based on necessity. Sometimes, alternative financial mechanisms, such as invoice factoring, might align more closely with your requirements than standard term loans;
  • Borrowing Capacities. Typically, the spectrum of unsecured business loans can vary, starting from a modest $1,000 and extending up to $500,000. Engage with a lender whose borrowing thresholds harmonize with your enterprise’s financial requisites, ensuring you neither under-borrow nor overshoot;
  • Repayment Conditions. The duration and terms of loan repayment can significantly influence monthly installments, thus affecting the affordability quotient. Aim to collaborate with a lender whose terms resonate with your enterprise’s fiscal strategy and constraints;
  • Associated Expenses. While interest remains a primary component, the cumulative cost of a loan can encapsulate origination charges, penalties for delays, and fees for early repayments. Conduct a holistic analysis, factoring in both immediate and long-term financial implications of each loan under consideration;
  • Customer Service and Credibility. Peruse the prospective lender’s online platform to gather insights about customer assistance provisions and their accessibility. Moreover, mining online feedback can provide a window into the actual experiences of prior borrowers, touching upon customer service quality and the overall lending journey. Engaging with peers in your network or specific industry sector can yield invaluable testimonials regarding a lender, allowing you to make a more informed choice.

Conclusion

Unsecured business loans present a vital financing option for businesses seeking capital without the mandate of collateral. These loans, while offering flexibility and prompt access to funds, also come with inherent risks due to the usual requirements of personal guarantees or UCC liens.

Such financial tools cater to businesses without substantial assets, enabling them to tap into necessary resources for growth. However, while unsecured loans eliminate the asset valuation step, they introduce higher interest rates, emphasizing the significance of thorough evaluation before opting for this route.

It’s essential for businesses to weigh the pros and cons of unsecured financing against other available alternatives to make informed decisions that align with their financial health and goals.