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Top Unsecured Business Loans & Ways to Apply

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Lantern

Updated November 2, 2020
Top Unsecured Business Loans
Managing a small business during COVID-19 is a challenging task. If you’re a small business owner, you know the struggles of managing cash flow, payroll, and business expenses while also working to safeguard the health and wellbeing of your staff and loved ones. If you need additional assistance during this time, there is help available. The CARES Act passed by Congress in 2020 established measures to support small business owners as they navigate through these challenging times. 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 loan—in the event that borrowers are unable to pay back the loaned funds. Collateral-backed lending can include secured small business loans. When a lender does not require collateral, it is known as an unsecured business loan. Below is an overview of the information you may need to find and apply for unsecured business funding.

What Are Unsecured Business Loans?

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 borrower(s). 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. In the event that a business owner doesn’t have necessary collateral, they 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 a how to get a business loan. 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 housing of the business owner(s). Naturally, loan terms and the fine print may vary from lender to lender.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 loan gets paid back. Additionally, failing to repay a loan may severely impact a borrower’s credit rating, which can affect the likelihood of getting approved for lender financing in the future. 

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 before choosing a lender and loan product. The following pros and cons might be helpful when deciding if unsecured business financing is right for you:

Pros of Unsecured Business Loans

  1. 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 quick financing, an unsecured loan may be a good option.
  2. 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. 
  3. 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, secured loans are not typically discharged and lenders can still seize property, even after bankruptcy. 
  4. Lenders may have fewer restrictions on how you use funds: Unsecured business loan terms, conditions, and restrictions may give you more flexibility with how you use the funds. Borrowers cannot, of course, use business loan funds for illegal purposes. 

Cons of Unsecured Business Loans

  1. Unsecured loans may have higher interest rates: The risk involved with 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. 
  2. Eligibility requirements: Without collateral, lenders may rely more heavily upon other eligibility requirements—factors like a loan applicant’s credit rating, 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 and you may need to seek other loan options, like bad credit business loans.
  3. Smaller loan amounts: Due to the increased risk that comes with no pledge collateral, lenders may not offer larger loan amounts. With a collateralized loan, lenders are more protected and may offer more funding. 
  4. 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. 

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 property (homes, land, offices), vehicles, jewelry, collectibles, stocks and bonds, cash savings, 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: Mortgages, auto loans, home equity line of credit, equipment loans, inventory financing, business line of credit (these can be unsecured as well). 
  • Examples of unsecured loans: Credit cards, business lines of credit, student loans, construction loan, Signature or Good Faith loans from an established banking institution. 
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 vs. unsecured which are typically shorter terms
  • Some secured loans may actually offer less financing than you’re looking for, because they’re based on value of collateral, not just on the financial history of your business or the creditworthiness of the business owner(s). 
  • Longer processing time is possible, because the lender needs to appraise the value of the collateral and how it’s tracked. 

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 as a small business owner. 

Short-Term Loans

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 can repay in a shorter time period, 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.

Loans with Personal Guarantees

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 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, via assets like personal bank accounts and real estate, 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 business lines of credit, because loan amounts are generally smaller and limited to shorter terms. If you don’t have an established credit or business history, a business line of credit may be a good option for a business capital lending. Lines of credit tend to be easier to qualify for than a loan, although credit limits can fluctuate depending on the lender and on the applicant’s creditworthiness and financial history (among other factors). 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 towards 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 individual lenders/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 many lenders/investors may require a high credit rating to qualify for larger loan amounts. 

Merchant Cash Advances

What is it?: A merchant cash advance (MCA) gives cash up front in return for repayment taken as a percentage of the borrowers 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 are in search of a bad credit 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. 

Applying for an Unsecured Business Loan

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 small business loan, it could be helpful to review these steps when preparing to apply.

1. Determining 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 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. Understanding 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:
  • Strong personal and business credit history
  • Minimum amount of time in business
  • Business finances/revenue
  • Monthly cash flow
  • Business bank accounts

3. Deciding 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. Choosing a lender

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. If you decide to go with an alternative lender, you could compare your business loan options online prior to submitting your application. 

5. Preparing 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. Submitting an application

After you’ve chosen a lender or financing company and gathered the necessary documents, follow the lender’s or 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.

Small Business Loans

A personal business loan may be useful if you don’t qualify for other types of business loans. Borrowers can use the funds for personal and business expenses, offering more financial flexibility. 

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 with this type of financing. 

Microloans

Microloans may help support small businesses who do not have access to larger sources of funding. They are generally offered by nonprofits, government agencies, or individual 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, or warehouses.

Search for Unsecured Business Loans with Lantern Credit

An unsecured business loan can be a great option for business owners who don’t have, or don’t want to offer collateral when applying for financing. There are numerous loan options, programs, and lenders to choose from—and Lantern Credit is here to help.  In a matter of minutes, you can get access to our comprehensive list of reputable lenders and resources to help you make a lending decision that aligns with your business and financial goals. Simply provide a few details about your business to compare small business lenders in minutes.
No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC20036

About the Author

Lantern

Lantern

Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.