With so many small business loan options, it can be challenging to know what choice is best. For many business owners without any assets that could be used as collateral, a business loan from traditional lenders becomes more difficult — if not unattainable. Fortunately there is small business financing available that doesn’t require specifically identified collateral to secure the loan. This type of small business loan is called an unsecured business loan.
Learn what an unsecured loan is, what the benefits are, how to qualify and apply for one, and the best unsecured loans in 2023.
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What Is an Unsecured Business Loan?
A loan is considered “unsecured” when it doesn’t require the borrower to put down specific collateral like real estate, heavy equipment, or some other easy-to-liquidate asset in the case of default. There are millions of small business owners who have profitable businesses but don’t have assets like these that a lender would accept as collateral.
What unsecured loans typically do require instead of collateral is a personal guarantee. A personal guarantee is an agreement that the borrower will use their personal assets to repay their business loan if the business fails to pay it off. Your personal assets may include your home, your personal savings, or your car — so keep in mind that signing an unsecured loan puts your personal valuables at risk.
What Are the Benefits of an Unsecured Business Loan?
Although many of the small business loans that would be categorized this way often come with higher interest rates than a traditional bank loan or an SBA-guaranteed loan, they have some distinct benefits and advantages when compared to their more traditional counterparts.
- These loans are based upon the financial strength of your business and your credit profile and not dependent upon whether or not you have sufficient assets to be used as collateral.
- Healthy businesses can access borrowed capital more easily when compared to traditional collateralized financing.
- The application process for these loans is often easier and more accessible.
- Lenders offering this type of financing may respond to a loan application within the same day.
- Funds may be available to the business owner within one or two days.
- Loan repayment terms are designed to fit the business need.
For many small businesses, the ability to access borrowed capital quickly and easily without the need to lean on real estate or other assets is attractive — even if they do have assets they could use as collateral.
1. Understand How the Application Process Works
Small business loans are not something to jump into blindly, and using this guide will help you prepare for the loan application process. You can also use your Nav profile to see what lenders are looking for in potential borrowers and which options would be the right fit for your business using your unique business details.
If you’re looking for access to a quick cash solution, business credit cards are a fantastic tool. But if you need a higher line of credit, many traditional lenders may not be a good fit because it takes longer to apply and to receive funding. On the other hand, most online lenders today offer streamlined applications with a simple online application, a quick answer to your loan request, and access to funds in a matter of days — much faster than what is typically available at the local bank or credit union. Keep in mind that you may pay for the speed with higher interest rates, so it’s a good idea to compare all your options.
Ask yourself these questions to better prepare yourself for the lending cycle ahead:
- Do I have time to see the application process through? How fast do I need the money?
- Am I prepared to provide the financial records that will be asked of me (these will vary depending on the lender)?
- What does my personal credit score and business credit history look like?
- Do I want to do the application online or in person?
- What loan amount do I need to fill my business need? What is the ideal amount?
- Is there a type of loan that I’m not interested in?
- Do I have collateral and do I want to use it to secure a loan?
Having these questions answered ahead of time can help you through the next step.
2. Types of Unsecured Business Financing
There are many types of unsecured business loans that may be available to you:
- Short-term business loans
- Lines of credit
- Business cash advances (also called merchant cash advances)
- Equipment financing
- Invoice financing
Ask yourself how long you need to pay back the loan. Some short-term business loans, including vendor or merchant financing, are options that won’t require collateral in most cases but will require repayment within weeks or months. Business cash advances usually require a daily automatic debit from your business bank account. Standard SBA loans, on the other hand, give you up to 10 or more years for repayment, but typically require collateral. Generally speaking, the SBA doesn’t always require an SBA-guaranteed loan to be fully collateralized, but they will expect all the collateral you have available — including any personal property you might have. If you’re needing cash to buy business property, you may have the same number of years you get for a home loan (15 or 30 years, in some instances.)
There is a correlation to how easy capital is to access and the cost of the capital in terms of interest costs. From a lender’s perspective, collateral provides a way to mitigate the risk of default because they can liquidate your asset to recoup some of their loss if you are unable to meet your loan obligations. Additionally, the often weeks-long process to evaluate your loan application at the local bank gives them more time to evaluate your creditworthiness in an effort to also mitigate risk. You can think of the costs associated with an unsecured loan as one of the ways these lenders mitigate the risk they’re assuming by offering an easy application, a quick response, and not requiring collateral.
Borrowing always has costs associated with it, regardless of where you borrow. Because unsecured financing is often short-term financing, the periodic payments will likely be higher and more frequent than a comparable longer-term loan secured with collateral, it will be important to make sure you have the cash flow to support the periodic payments. The benefit of these shorter-term loans will be that the accrued interest will likely be lower, making the overall cost of debt much less than the longer-term version of the loan.
3. Minimum Qualifications for Unsecured Business Loans
Lenders each have their own specific criteria for who makes a good applicant. You don’t want to waste time applying for unsecured business loans you won’t qualify for.
Here are a few of the basic requirements most lenders look for:
- A good personal credit score – Most traditional lenders will want to see a minimum credit score in the 700s. However, there are many lenders that will work with a business owner who has a personal score in the 600s, provided they can otherwise show a healthy business and a cash flow that will support loan payments. There are even some who will accept a personal score lower than that — but you should expect to pay a higher interest rate or increased fees.
- An established and acceptable business credit history – Lenders are trying to evaluate what you will do in the future based upon what you have done in the past. That’s why they look at your business credit scores, and also why it’s so difficult for very early-stage businesses to access borrowed capital. Fortunately, you don’t need several years in business to qualify for a business loan. Many lenders offering unsecured financing will work with most businesses if they have a track record, or business credit history, of only one year.
- Business history – Two years’ demonstrated business activity is what most traditional lenders state as their minimum to qualify, but some financial products may be a bit more flexible. Loans marketed specifically to younger businesses, for example, could rely on sales figures or cash flow reports as an indication that things are going well for you.
- Your revenue – Banks will usually offer you a percentage of your sales, so the more you made in the past two years, the bigger your loan amounts can be. Many lenders will want to see annual revenue of at least $100,000, but alternative lenders may be more willing to work with lower revenues.
Each lender will have its own internal standards, however, and the approval process can be a bit nuanced. In the end, the decision to give you a loan will come down to each lender’s individual processes. The good news is that Nav understands what lenders want. Use Nav to get behind the scenes in the loan process and see which options fit your unique business’s needs — instantly.
4. Prepare Your Application Materials and Documentation
While the previous three steps may seem involved, preparing the paperwork for the loan is the part most people dread. The upside is that, if you tackle it early (and before you apply), you can avoid surprises and help speed the process along. It’s possible for many lenders to provide you with an answer on your loan application on the day you apply, especially with most online banks.
The time it takes from application to approval of unsecured business financing is counted from the time a small business owner puts in a completed application. Prepare the following documentation ahead of time for the smoothest application process possible:
- Time in business: This will be documented by your articles of incorporation, tax returns, and other filings.
- Industry type: Not all loans are available to all industries.
- Business plan: Check your business plan for relevancy, or update it if needed.
- Uncollected invoices: Also known as outstanding accounts receivable, these can help demonstrate the money you’ll be getting in the short-term to help pay down the loan.
- Various business reports and financial data sheets: This includes profit and loss statements, cash flow forecasts, balance sheets, and asset lists. With an unsecured loan, showing you have assets can help prove the net worth of your business and get you access to additional funding.
- Personal tax returns.
- List of all your debts and payments due (also called a debt schedule).
- Personal and business bank accounts, with most up-to-date balances
- Documentation of other business debts paid satisfactorily.
- A plan for how you’ll use the funding (working capital or debt refinancing, for example).
- Your business’s budget during the repayment period.
Not all loan applications will ask for all this info, especially specific short-term loans from online lenders.
Most online lenders will want to see:
- Your business license
- A business checking account
- Your federal tax ID number
- Your annual revenues
- Your personal credit score and business credit history
- Three months of bank statements
By having this documentation ready, you’re prepared for whatever the lender asks of you.
Best Unsecured Loans in 2023
The best loan is the one you can get, so your eligibility is top of mind when you’re searching for an unsecured loan this year. It’s also important to know what your business’s goals are and the financing options that will help you succeed. If you’re looking for a loan agreement with a lower interest rate, turn to traditional business funding like banks and credit unions first to see if you qualify. If you need fast funding, your best funding option is probably with an alternative lender.
Alternative Unsecured Lines of Credit
Lines of credit provide flexible funding, and they are one of the most common options that small business owners turn to. Instead of getting a lump sum like with a business loan, you get access to a credit line that you can use as needed. For most lines of credit, you only pay interest on the amount you use.
Here are some of the best alternative lenders that offer unsecured lines of credit:
Alternative Unsecured Business Loans
A business loan may be the right choice for your small business, and it doesn’t mean you have to drive down to your local bank to get one. There are online lenders that provide term loans for small businesses.
Secured Credit Cards for Bad Credit
If you have bad personal credit, qualifying for a credit card can be a challenge. Even business credit card providers look into your personal credit when they decide if you qualify. However, you may have options (although some are personal credit cards), and some even might help you build your credit while using the card.
Unsecured Business Lines of Credit for Startups
New businesses have specific financing needs, and many lenders are unwilling to work with a borrower without a lot of proven time in business. But you’re in luck — here are some great lines of credit for businesses that have one year or more under their belt.
While the steps above will get you through the process of most business loans, there are some unique questions business owners often have when completing their application. Here are the most common questions and answers.
How can I qualify for the best unsecured business loans rates?
The lender will look at a number of factors, including your time in business, your annual revenue, and your personal credit history and business credit profiles. Building and maintaining a strong personal and business credit history is the first step.
Just a few points can be the difference between premium rates and something that will make your monthly payments unaffordable. If your score is lower than you’d like, consider holding off on getting a loan until you’ve hit the good to excellent credit range. The better your score, the less likely the lender will be to look to your personal assets or business assets as collateral.
A strong credit profile might not be a guarantee that you’ll qualify for a loan, but it will increase the number of options you’ll have to choose from.
Are there separate unsecured business loans for startups?
As a new business, you’ll have more limited options for financing, but that doesn’t mean you can’t get funding. There are alternative lenders that are willing to loan to businesses that only have six months or one year in business. Only Nav can use your specific business details (including your time in business) to help you find the top options that will work for you. Your experience as a new business owner searching for loans shouldn’t be a headache, and Nav is the easiest way to funding.
Is it possible to get unsecured business loans with bad credit scores?
Unsecured small business loans are more challenging to get if you have bad credit or no credit, but you may be able to qualify for specific alternative lenders. Some lenders will accept borrowers with credit scores in the low 600s or even in the high 500s. These loan options might be unsecured, like with lines of credit, but you can expect to agree to a personal guarantee. A personal guarantee says you’ll pay back what your business borrows from your personal assets (savings, home, etc.) if your business fails to make payments. Additionally, you’ll likely pay a higher interest if you have bad credit.
Using business credit cards may also help you to establish and build your personal and business credit scores. Work with Nav to find the business funding you can qualify for today.
Will I qualify for unsecured business loans with no personal guarantee?
Most lenders today — both traditional lenders and online lenders — will require a personal guarantee except for all but the most established and creditworthy borrowers. In most cases, you should expect a personal guarantee to be required.
If you happen to have a robust enough business to guarantee it on the sales performance of the company, alone, it’s possible to get an unsecured business loan with no personal guarantee. Just don’t expect it to be as large of a loan amount as a secured business loan. You will still be expected to provide some personal information on the application.
Do banks look at personal credit for business loans?
Yes. Banks and alternative lenders look at the personal credit scores of the small business owners before they are willing to lend to the business. Each lender will have its own specific minimum credit score requirements to qualify. So that means it’s essential to build up your personal credit score as a small business owner who is looking to get funding.
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This article was originally written on July 22, 2019 and updated on February 3, 2023.
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