Pros and cons of unsecured business loan

Key takeaways

If you own a business, borrowing money can provide a financial boost when you’re ready to scale up or require more cash flow. Unsecured business loans are one popular option because they don’t require collateral and are available from traditional banks, online lenders and credit unions.

If approved, this type of loan could help with everything from covering an unexpected expense to expanding your business. But you’re likely to be required to sign a personal guarantee.

Learn about the pros and cons of unsecured business loans, including the typical expenses and requirements of this type of loan.

Compare the pros and cons of unsecured loans

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  • Don’t require assets to secure the loan
  • May offer fast funding
  • Accessible to different types of borrowers
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  • May have higher interest rates
  • May have strict requirements
  • May require a personal guarantee

Pros of unsecured business loans

Unsecured business loans are popular for a few reasons.

Doesn’t require business collateral

The main benefit of unsecured small business loans is they don’t require collateral like secured loans do. With secured loans, 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, much faster than loans from banks and credit unions.

Accessible for various types of borrowers

You don’t have to have perfect business credit to qualify for all unsecured business loans. There are various types of unsecured loans that are accessible to borrowers with poor credit history or little time in business. Apart from a traditional unsecured term loan, businesses can explore:

  • Microloans
  • Merchant cash advances
  • Invoice factoring
  • Unsecured lines of credit 

Cons of unsecured business loans

Here’s a look at the drawbacks that may make alternatives to unsecured 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 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.

Most unsecured business loans tend to carry higher rates than secured loans. The types of unsecured business loans also play a role in how much you can expect to pay in interest. Some unsecured options like invoice financing or merchant cash advances are considered high-risk loans, usually made to companies experiencing financial or cash flow problems.

High-risk loans available to business owners with bad credit may show the cost of an unsecured loan using factor rates instead of interest rates or APR. Make sure you know how to convert factor rates to an annual interest rate to help you compare offers from different lenders.

May have strict eligibility requirements

Another way that lenders compensate for the increased risk of offering unsecured loans is by having strict eligibility requirements. These loans are often reserved for established businesses with good credit, two or more years of experience and high annual revenue. When applying for an unsecured business loan, the lender will likely require various business documents to confirm your cash flow and 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:

  • Secured loans and lines of credit: These require you to put down collateral against the loan, such as a piece of property or certificate of deposit. Because of collateral, they may have a lower interest rate than an unsecured loan.
  • SBA loans: Small Business Administration and available from a variety of lenders, they have a set maximum interest rates, making them accessible to many small businesses.
  • Business credit cards: These cards operate like personal credit cards. You can use the revolving line of credit as short-term lending for projects and to pay vendors. While business credit cards typically have lower credit limits than a loan, you won’t pay interest if your balance is paid in full monthly.
  • Business grants: Grants don’t have to be repaid, making them appealing. They are available from government and private sources but can be competitive and have long application processes.
  • Crowdfunding: Crowdfunding campaigns allow friends, family and strangers to invest in your company. Often, it’s in exchange for a reward or equity, but they can also be donation based.
  • Peer-to-peer lending. This type of lending often has the same requirements as traditional loans but is funded by a group of investors or a company, making it less formal.

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.