Most business loan and credit card applications ask questions about your assets. The fact is that secured business loans – those where you offer up your business property as collateral – are the most common loans talked about in conversations regarding business credit. There is another option, however.
The unsecured loan does exist. It’s aimed at those who don’t have (or don’t want to risk) their personal or business property, should they fall behind on payments and default on the loan.
As with any financial product, there are pros and cons to this type of lending. Even if you think that it may be your only choice for funding, read through these facts carefully. Ask these questions to help you decide:
- How much money do I need?
- How long do I need to pay it back?
- What is my business and personal credit like?
- Will I get better terms if I wait?
Perks of an Unsecured Loan
Some businesses have done good things with these loans. Here’s why they continue to be a popular offering:
They are fast.
Because assets aren’t involved, there’s no need for the bank to send out an assessor to calculate the value of your property. Many of these loans can be applied for solely online. Decisions are often made in minutes, with cash available within a few business days. (Loans through the SBA can still take the standard month or longer for access to funds.)
They don’t put your assets at the same risk.
No collateral means that, if the worst should happen, you won’t have your personal assets sold or liquidated. That doesn’t mean you’re off the hook if you can’t pay. It’s a tough life for businesses owners, and – even if you file for bankruptcy protection – expect to have to make payments on your debt for a long time. You can rest assured, however, that your home won’t be the way they get their money.
They are friendlier to risky businesses.
These loan products are marketed to those with lower credit scores. You still have to demonstrate an ability to pay, but newer businesses and those with good sales (but less documentation) may have a shot when other loans have shut them out. An unsecured loan may be a way to get credit and establish your credit score so that you can apply for larger or cheaper loans down the road.
Downsides to the Unsecured Loan
Just like the unsecured credit card, which is open to more people but comes at a higher price, the unsecured loan has its downsides. Know if these are worth it before you apply.
They are expensive.
Interest rates on an unsecured loan are significantly higher than the rates for standard loans. Expect to pay 2-3 times what you’d pay for a standard, secured loan through the SBA. With fees and interest, it’s on par with an unsecured credit card with penalty rates. Some unsecured loans have rates of 30% APR or more. In addition, the monthly payment may be high, since banks want to recoup their money quickly. Prepare to adjust your budget significantly to repay one of these loans.
They have accelerated repayment terms.
As mentioned, the payments are usually higher because the banks want their money back – fast! Loans of two to three-year terms are common, but some loans require repayment in as little as a few weeks. Fewer than 18 months is most likely.
They don’t approve everyone.
Remember how we said that the unsecured loan is a way for some business owners to get money if they don’t qualify for more restrictive, secured loans? It’s still not an option for all businesses. If you can’t demonstrate your ability to pay back the loan, expect to get a “no” from the bank. Banks still exist for profit, and they aren’t in the market to extend credit to unreliable borrowers. The best way to offset a lack of revenue or collateral is with a good credit score, so continually work on your credit profile by doing these things:
- Check your credit report often, and be aware of sudden changes that may signal trouble
- Encourage your vendors to report your on-time payments to credit agencies
- Keep your personal credit score healthy; encourage responsible use of company credit by employees and staff
- Look for trends in credit use, and seek out credit opportunities that can lower interest rates and overall debt-to-income/revenue numbers
- Don’t apply for new credit until you’re ready; frequent credit inquiries (hard pulls) can lower your score
- Inquire about paying down debt early; look for credit opportunities that reward early payments
The Wide World of Unsecured Loans
If you’ve heard that an unsecured business loan is the silver bullet you need to get fast cash for your business, consider what you’re giving up when you apply. For the responsible borrower who can repay the terms and use the money to invest in certain growth categories, the decision may be profitable. If you’re thinking of using it to consolidate debt or float along in a low-cash period of your business, it could cost you more than it’s worth.
Take the full cost of the loan into account when applying, and be sure to get your credit score at the highest you can before applying so that you can take advantage of the lowest interest rate and best terms for this category of financing. Thankfully, many lenders are getting into the unsecured market. Some of the places you can look for unsecured funding for your business include:
- P2P (peer-to-peer) lending platforms
- Your local bank
- Credit card companies who are expanding their market
- The Small Business Administration (SBA)
- Online lenders
Many of these options will allow you to make a preliminary application to show you what loan amounts and repayment terms you are eligible for. Don’t be afraid to comparison shop before you submit that final, formal application! You may also find a personal loan to be a good fit, so research these options, as well. The right unsecured business loan may be waiting for you.
This article was originally written on May 8, 2019 and updated on January 27, 2021.