Pros and Cons of Unsecured Business Loans

PixelsEffect/Getty Images.

If you own a business, you’ll likely find a time when you need to borrow money. Whether you’re covering an unexpected expense, making up for a cash flow shortfall or getting funding to expand your company, unsecured business loans are a popular option.

Keep reading to learn more about this type of loan, including its advantages and disadvantages.

Pros of unsecured business loans

Unsecured business loans are popular for two main reasons.

Doesn’t require business collateral

The main benefit of unsecured small business loans is they don’t require collateral. With secured loans, you need assets of value to help secure the loan. Lenders often require those assets to carry as much value as the loan you want to take out. Not every company has enough assets that can serve as effective collateral.

Using assets as collateral can also be risky for some businesses. If you fail to repay the loan as agreed, the lender has a right to take the property you use to secure the loan. If you don’t have a way to secure a loan or don’t want the added risk of providing valuable assets, an unsecured loan is a good choice.

May offer fast funding

Many unsecured loans offer faster approvals and funding. You don’t need to offer any documentation showing your business collateral or wait for the lender to research and appraise the collateral’s value.

The fastest business loans tend to come from online lenders specializing in streamlined application processes and quick approvals. It’s possible to get funding within one to three days with these lenders, which can be much faster than loans from banks and credit unions.

Some popular types of loans with quick funding that don’t usually require collateral include business lines of credit, invoice factoring, and merchant cash advances.

Cons of unsecured business loans

Here’s a look at the drawbacks that may make alternatives to unsecured business loans more appealing.

More expensive

Unsecured business loans are riskier for the lender than secured loans. With a secured loan, the lender can take the collateral to recover its losses if you fail to make payments. With an unsecured loan, the lender relies more on your creditworthiness and business credentials. Lenders compensate for that higher risk through higher interest loan rates and fees.

Even the best unsecured business loans tend to carry higher rates than secured loans. But the types of loans for businesses with bad credit are often the most expensive. That’s because unsecured options like invoice financing or merchant cash advances are considered high-risk loans that are usually made to companies experiencing financial distress or cash flow problems.

May have strict eligibility requirements

Another way that lenders compensate for the increased risk of offering unsecured loans is by having strict eligibility requirements for some types of unsecured business loans. This includes term loans and lines of credit with the best rates, high loan amounts, lower loan fees and longer repayment periods. These loans are often reserved for established businesses with good credit, two or more years in business and high annual revenue.

Unsecured loans for startups and business owners with bad credit are available but tend to have unfavorable terms. This includes lower loan amounts and shorter repayment periods.

May take time to receive funds

Not all lenders offer fast unsecured business loans. If you apply for an unsecured loan from a bank or credit union, it could take days to get approved and a week or longer to see funds. Online lenders are the way to go if you need quick cash. Many offer next-day funding.

May require a personal guarantee

Many lenders of secured and unsecured loans will require a personal guarantee before approving a loan. This puts your personal assets at risk if you default on the loan.

Personal guarantees are usually required for anyone who owns a certain percentage of the business. For example, many lenders will want anyone with 20 percent to 25 percent ownership to sign a personal guarantee and be personally liable for repaying the debt.

Alternatives to unsecured business loans

Unsecured business loans are just one source of funds that your company can consider. There are many other ways to get funding or borrow money for your company. Some have easier qualification requirements, let you borrow more money at once or are less expensive.

Some alternatives to consider include:

Bottom line

Unsecured business loans can be a good source of funding for your company. They may have higher costs and require strong credit and business finances, but they let you borrow without risking your company’s assets. They also offer simple applications and quick funding.

Think about whether an unsecured loan is right for your company. Make sure to shop around and compare offers from multiple lenders to get the best deal. The most affordable option for you can make managing your loan and business easier.

Frequently asked questions

• Do banks give business loans without collateral?

  Yes, many banks offer unsecured business loans with no collateral. But your company will need a strong financial history and good credit to qualify.

• Which business loan types do not require collateral?

  Many types of business loans don’t require collateral. Some examples include:

  • Unsecured term loans
  • Lines of credit
  • Invoice factoring
  • Invoice financing
  • Merchant cash advances

• What can you do if you are denied an unsecured business loan?

  If you get denied for an unsecured business loan, you can consider applying with another lender or looking at a different type of unsecured loan. If you’re having a lot of trouble getting approved, consider a secured loan instead.