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Most companies will need a business loan at some point. Whether you need to cover unexpected expenses or want to take advantage of a time-sensitive opportunity, access to capital can mean the difference between success and failure.
Getting the money you need, however, can be difficult. Many lenders require collateral on a loan. If a business hasn't yet established a robust credit history, its owner might have to put up personal collateral such as a house. To get an unsecured small business loan, you'll need to find the right lender and show your business has the means to pay back the loan.
Learn how unsecured small business loans can get the money you need to successfully run your business without putting up collateral.
How Unsecured Small Business Loans Work
Unlike most traditional business loans, unsecured loans don't require collateral for loan approval. This means you don't have to give your lender access to your business or personal assets if you can't pay back your loan.
A unsecured small business loan works like this: Your lender agrees that you have the income available to make your loan payments over the life of the loan. By allowing you to get financing without collateral, your lender is showing confidence you'll pay back the loan.
How to Get an Unsecured Business Loan
Some lenders make it difficult to get a loan without putting up collateral. By not securing the loan, the lender is taking on a lot more risk. If the borrower suddenly can't pay, the lender won't have assets available to recover the cost of the loan.
Most lenders, for example, require all new borrowers to start with a secured business loan. After a relationship is established, you may qualify for an unsecured loan. Building that relationship with your lender can cost a lot of money and time.
There are options, however, for unsecured small business loans that have higher approval odds. Alternative lenders—lenders that aren't a major bank, often doing business only online—sometimes have an easier application process and may not require collateral. If you're a business owner thinking about applying for an unsecured loan, an alternative lender may be your best option.
Types of Unsecured Business Loans
There are several types of business loans that don't require collateral. Depending on your business's financing needs and income, some of these options may make more sense for your company.
Though uncommon, you may be able to find a long-term business loan that doesn't require collateral. Terms on a long-term loan can range from a few years to a few decades. Since most long-term loans are for larger amounts and require many years of repayment, lenders are less likely to offer an unsecured long-term option without having a history with your business.
Short-term business loans, on the other hand, often are offered with no collateral requirements. If qualified, you can find many options for short-term unsecured loans from online lenders. Most short-term loans have a repayment period of one year or less. They're often a good type of loan to use to get through a slow period, pay unexpected expenses or take advantage of a time-sensitive growth opportunity. An unsecured short-term loan can be a great option for small business owners.
Merchant Cash Advance
Another type of unsecured business loan is a merchant cash advance. Ideal for businesses that do a lot of credit and debit card sales, this unsecured loan is repaid using a fixed percentage of daily credit card sales. There are no fixed payments required for a merchant cash advance. Instead, a percentage of your daily credit or debit card sales goes to paying back the loan.
Before you decide if a merchant cash advance is right for your business, be sure you look at the loan's interest rate and the percentage of sales your lender requires. You may find that a high interest rate and loan repayment terms that require a large percentage of daily sales reduce the benefits of an unsecured merchant cash advance.
Advantages of Unsecured Small Business Loans
Many small business owners are willing to do whatever it takes to ensure the survival of their business. This often means taking risks. An unsecured loan helps you minimize those risks by not requiring you to tie your personal or business assets to a loan. It also minimizes the risk to your personal credit in the event your business defaults on loan that's connected to your personal credit.
Finding the Right Unsecured Business Loan
There are many options for an unsecured business loan. You can help the success of your business by choosing the best loan for your needs. Make sure you shop for potential lenders and pick one that has a record of success in unsecured loans for businesses.
Choosing an unsecured business loan is a smart choice for most business owners. You'll be able to help keep your personal and business assets safe by funding business needs through an unsecured loan.