If you’re a business owner with limited or no collateral for a business loan, you may find it harder to get the financing you need to support your business. Some traditional lenders, like banks and credit unions, generally require collateral to secure a business loan — in the event that borrowers are unable to pay back the funded loans.
Unsecured Business Loans Explained
An unsecured business loan is one in which the lender usually does not require collateral. Instead, the lender relies heavily upon the creditworthiness of the applicant. In contrast, with a secured loan, lenders may require collateral in the form of real estate, equipment, or another type of asset. Collateral can help lenders to offset the risk of loaning out money, but not all businesses or business owners (even established ones) have adequate funds or assets to offer as collateral.
If a business owner doesn’t have necessary collateral, he or she may opt to apply for an unsecured business loan. While unsecured business funding may not require a borrower to pledge specific business collateral, like real estate or equipment, some lenders may still ask for a personal guarantee from applicants.
A personal guarantee is a written promise to personally pay back the loan in the event that your business cannot. This differs from collateral because a personal guarantee is not linked to any specific asset, which may offer some borrowers more freedom when looking for small business loans.
However, it’s important to keep in mind that, when a business defaults on the loan repayment, the personal guarantee may allow the lender to seize personal assets, which could include checking and savings accounts, cars, and even a house.
Not all unsecured business loans require a personal guarantee or collateral. But borrowers may still find that unsecured business loan rates are higher than the interest charged on a secured loan, because the lender is taking on more risk. Even without the collateral or personal guarantee, lenders can still take legal recourse when an unsecured loan isn’t repaid. They may send outstanding accounts to debt collection or sue to ensure the money gets paid back.
Additionally, failing to repay a loan may severely impact a borrower’s credit score, which can affect the likelihood of getting approved for lender financing in the future.
Unsecured vs Secured Business Loans
The primary difference between an unsecured business loan and a secured business loan comes down to collateral. Secured business loans are those that require collateral in the form of a valuable asset, while unsecured loans do not.
While collateral is the main factor that separates these two types of loans, there are a few other differences to note:
• Secured loan amounts are typically determined by the loan-to-value ratio (LTV) of your collateral. Lenders use loan-to-value ratio to determine how much they choose to loan out based on the value of the collateral. Asset values can vary depending on the type of asset. For example, real estate that’s not considered “ready-to-go” may result in a loan amount that’s smaller than a piece of property that’s completely paid off. Lenders may also look at LTV differently, so it’s important to consult with individual lenders about how they calculate asset values.
• Collateral can be business or personal assets. These may include real estate, vehicles, jewelry, collectibles, stocks and bonds, cash savings, and assets that can be converted into cash.
• Secured loans typically have longer repayment terms. Because a secured loan poses less risk, lenders typically give longer repayment periods compared to unsecured loans.
Examples of secured loans are mortgages, secured auto loans, home equity lines of credit, and commercial equity lines of credit (CELOC). Examples of unsecured loans include student loans, unsecured personal loans, and business signature loans.
When comparing secured and unsecured loans, secured loans can offer some potential benefits for borrowers with valuable assets, but they also come with some potential complications — including:
• Risk of losing any pledged collateral (if the borrower defaults on repayment)
• Longer repayment terms mean you’re paying the loan for a longer period of time compared with unsecured business loans that typically have shorter terms
• Some secured loans may actually offer less financing than you’re looking for, because they’re based on the value of collateral, not just on the financial history of your business or your personal creditworthiness.
• Loan applications can take weeks or months to process if the lender requests to appraise the value of the collateral and how it’s tracked.
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Pros and Cons of Unsecured Business Loans
Some business owners may pursue unsecured business loans, but there are pros and cons to be aware of. The following pros and cons might be helpful when deciding if unsecured business financing is right for you:
Pros of Unsecured Business Loans
• Faster potential turnaround time: No matter what type of business loan you’re seeking, lenders will likely conduct a thorough check on your qualifications. But an unsecured business loan typically requires less time to approve (since lenders do not need to vet and verify collateral). With a secured business loan, lenders generally need to assess the value and legitimacy of collateral, which can require more time. For borrowers who need financing to come quickly, an unsecured loan may hold appeal.
• Lenders can’t seize property (without a court order): One of the risks of a secured business loan is having valuable assets seized if you default on the loan. With an unsecured business loan, lenders cannot seize business or personal property (without a court order), because no collateral has been pledged to the lender.
• Unsecured loans may be discharged if you file for bankruptcy: In the unfortunate event that your business has to file for bankruptcy, an unsecured business loan may be discharged, meaning you may not be liable for a business debt. Most unsecured loans are considered non-priority debt under various laws and, in some cases, may be discharged in bankruptcy. In contrast, discharging a secured loan in bankruptcy may not prevent a creditor from seizing the collateral.
• Lenders may have fewer restrictions on how you use funds: Unsecured business loans may give you more flexibility on how you can use the funds compared with secured business loans. Borrowers cannot, of course, use business loan funds for illegal purposes.
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Cons of Unsecured Business Loans
• Unsecured loans may have higher interest rates: The risk involved in providing an unsecured business loan can be significantly higher for lenders. Consequently, unsecured loans typically have higher interest rates for borrowers than the rates on a secured loan.
• Eligibility requirements: Without collateral, lenders may rely more heavily upon other eligibility requirements — factors like a loan applicant’s credit score, financial history, and business revenue. If you have poor credit or lack sufficient revenue, a lender may deny your application for an unsecured business loan.
• Smaller loan amounts: Due to the increased risk that comes with no collateral, lenders may not offer large loan amounts. With a collateralized loan, lenders are more protected and may offer more funding.
• Personal guarantee may be required: Even though an unsecured business loan doesn’t require specific collateral, lenders may want a personal guarantee so they know the loan will be paid in the event of default. When you sign a personal guarantee, you are still responsible for paying back the loan even if your business dissolves, and lenders can still legally pursue a borrower’s personal assets, even if they aren’t noted as collateral.
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Types of Unsecured Business Funding
Financing a business with unsecured business loans offers a number of options for different types of small businesses. Check out the following unsecured loan types to learn more about your options:
Short-Term Loan
What is it? Short-term business loans give borrowers a sum of money upfront, which is then repaid with interest over a time set by the lender. Short-term unsecured business loans typically have terms of 18 months or less.
Why choose it? If you need a fast business loan that’s unsecured and you can repay fairly quickly, a short-term loan may help. Short-term loans may also be easier to get with poor credit, no credit, or minimal business history.
Keep in mind: Unsecured, short-term loans usually have much higher interest rates than other loan options because lenders are taking on more risk. Borrowing amounts may also be lower.
Loan With Personal Guarantee
What is it? Unsecured business loans with a personal guarantee are those in which the borrower signs a legal promise to repay the loan if the business defaults on the loan.
Why choose it? Loans with a personal guarantee can help borrowers get financing when they don’t have a well-established business, collateral, or creditworthiness to qualify for other forms of business financing on their own.
Keep in mind: There are limited and unlimited personal guarantees. Limited guarantees give lenders the ability to collect a certain amount of money or a specific percentage of the outstanding balance. Unlimited personal guarantees mean that the borrower is responsible for the entire balance of the loan and the lender can legally pursue payment for the outstanding balance.
Business Line of Credit
What is it? A small business line of credit with no personal guarantee is a type of short-term loan that can help with managing cash flow. Borrowers receive a set credit limit and use funds up to that limit, with interest paid on the money that gets withdrawn. Some lines of credit are revolving (aka able to be replenished), while others terminate when the balance is paid off.
Why choose it? If your business experiences seasonal fluctuations, a cyclical sales cycle, or has emergency expenses, a business line of credit can be helpful in supplementing cash flow. It’s typically easier to qualify for a business line of credit, because funding amounts are generally smaller and limited to shorter terms.
Keep in mind: Starting a business line of credit may have additional fees and costs to be aware of. In some cases, lines of credit offer smaller borrowing limits than a long-term loan.
Invoice Factoring
What is it? Getting business funding without personal credit may be challenging, but options like invoice factoring may be an additional option. Businesses receive a sum of cash when a factoring company purchases unpaid invoices at a discount. Funds can be used toward working capital and other smaller expenses. The factoring company takes ownership of the invoices, so they are responsible for collecting payment directly from customers. Technically, invoice factoring is not a loan but rather a cash advance based on invoices.
Why choose it? Invoice factoring can assist businesses that offer products and services with irregular billing cycles and B2B companies that deal regularly in customer invoices. Factoring companies offer a percentage of the value on outstanding invoices, giving the business faster access to cash.
Keep in mind: The cost of unsecured business financing via invoice factoring can be quite high. It may include additional fees and a variable APR if there are late payments from customers. Businesses also lose control over collections, so it’s important to make sure that factoring companies use ethical collections processes.
Peer-to-Peer Lending
What is it? With peer-to-peer (P2P) business lending, borrowers receive funding directly from other individuals, thus eliminating the need for a financial institution to act as a go-between. Borrowers and private investors connect using online platforms, and funding can happen quickly.
Why choose it? For small businesses and entrepreneurs that need cash quickly with competitive rates, P2P loans are one possible option.
Keep in mind: Loaned amounts are typically smaller than traditional loan offerings, and you may need excellent credit to qualify for larger loan amounts.
Merchant Cash Advance
What is it? A merchant cash advance (MCA) gives cash up front in return for repayment taken as a percentage of the borrower’s credit card sales. Automatic withdrawals are often set up for daily or weekly payments to make the repayment process quick and timely.
Why choose it? If you need quick access to cash for working capital or emergency expenses or your credit is poor and you are in search of a business loan with no collateral, merchant cash advances may help.
Keep in mind: You pay for the convenience of merchant cash advances, making them one of the most expensive unsecured business loan options — which means borrowers need to be extra careful about the lenders they work with.
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6 Steps To Follow When Applying
Since unsecured business funding doesn’t rely on collateral, many lenders will need adequate proof that a borrower is able to repay their loan. Whether you’re seeking a loan from a bank or an alternative loan provider, it could be helpful to review these steps when preparing to apply:
1. Determine How Much Funding You Need
The amount of funding you need plays a role in the type of unsecured business financing you apply for. If you simply need quick cash to cover a repair or emergency expense, you may consider a business line of credit or a short-term loan. In contrast, if you need enough to cover larger expenses over a period of time, you may seek an unsecured loan with a personal guarantee.
Here are some factors you may want to keep in mind when deciding how much cash is needed:
• What is the loan going to pay for? Is it absolutely necessary?
• How often will you be able to make payments?
• What is your ideal loan term?
• What is your budget?
• Do you have other sources of funding?
2. Understand What Your Business Qualifies For
Each lender or funding company will have their own eligibility requirements that can also vary, depending on the type of financing you apply for. Before applying, make sure that you meet general eligibility requirements for unsecured business funding.
Without collateral, some lenders may need more proof that you are capable of repaying the loan. The following factors may contribute to your eligibility:
• Personal and business credit history
• Minimum amount of time in business
• Business finances/revenue
• Monthly cash flow
• Business bank accounts
3. Decide Which Type of Unsecured Business Funding Is Right for You
You can now assess which type of unsecured business funding aligns with your needs and qualifications (and it may not be a loan). Some options include:
• Short-term loans
• Loan with a personal guarantee
• Business line of credit
• Invoice factoring
• Merchant cash advance
• P2P lending
4. Compare Lenders and Financing Options
Many lenders offer some type of unsecured business loan, including banks, credit unions, P2P platforms, and commercial lenders. Their loan products may differ, so it’s important to review their fees, interest rates, loan terms, qualifications, and any other conditions associated with the specific type of financing you’re pursuing.
5. Prepare Documentation
Before completing an application for an unsecured business loan, gather all necessary documentation. This may include:
• Business financial records
• Personal and business credit reports
• Cash flow projections
• Business plan
• Identifying information, which may include citizenship
• Business legal documents
• Business and personal tax returns
6. Submit an Application
After you’ve chosen a lender or financing company and gathered the necessary documents, follow the company’s instructions to apply. You may want to check with them to determine the average turnaround time — following up, as necessary, on the application.
Alternatives to Unsecured Business Loans
If you have collateral to offer, or simply desire alternatives to an unsecured loan, the following loan options may be helpful:
Restaurant Loans
Restaurant loans are useful for financing costs associated with starting or expanding a restaurant business. Many different types of lenders offer restaurant loans, including traditional banks, alternative lenders, or P2P lenders.
Franchise Financing
A franchising loan can help with the expenses associated with starting or expanding a franchise business. Traditional lenders may offer franchise financing, but there are also franchise companies who specialize in providing loans to franchise owners.
Equipment Financing
Equipment loans help businesses purchase business-related equipment. Loan terms are typically equal to the expected life span of the equipment and equipment acts as collateral for the loan. Interest rates can vary depending on the industry, type of equipment, and borrower qualifications.
Personal Business Loans
A personal business loan may be useful if you don’t qualify for other types of loans. Borrowers can use the funds for personal and business expenses, offering more financial flexibility. Not all lenders wish to make personal loans for business purposes. You can check with any lender you’re considering before you apply to make sure there are no restrictions against business use.
Inventory Financing
Inventory financing is a type of short-term loan that relies on the inventory as collateral for the loan. Inventory is paid for up front.
Microloans
Microloans may help support small business owners who do not have access to larger sources of funding. They are generally offered by nonprofits, government agencies, or private lenders and can be used for a variety of business-related expenses.
Commercial Real Estate Loans
Commercial real estate loans (CREs) are specifically for the purchase, refinance, or renovation of a commercial property. “Commercial” refers to the property as one that produces income for the business. These types of properties can include offices, retail storefronts, and warehouses.
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The Takeaway
An unsecured business loan can be an option for business owners who don’t want to pledge collateral when applying for financing. Higher interest rates often come with unsecured loans.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How much money can I get with an unsecured loan?
Some lenders may offer small business loans up to $5 million without a collateral requirement. You may need good credit to qualify for large loan amounts.
Does the SBA offer unsecured loans?
Some U.S. Small Business Administration (SBA) loan intermediaries may offer unsecured loans, but SBA loans generally require collateral and a personal guarantee of the business owner. SBA loan lenders can set their own lending and credit requirements.
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