Unsecured Business Loans: How to Get Collateral-Free Financing
Unsecured business loans provide access to funding without requiring borrowers to offer assets as collateral. This means that if you default on your debt for any reason, the lender would not be able to automatically lay claim to your property. While this may seem like a low-risk arrangement, a lender may take other measures to ensure repayment, such as assigning a high interest rate or requiring a personal guaranty on an uncollateralized loan.
What is an unsecured business loan?
An unsecured business loan is a form of commercial financing that is not backed by specific collateral. Without collateral securing the loan, the lender takes on more risk. If you don’t pay your debt, the lender cannot seize specific assets to recoup the loss. Because of this increased risk to the lender, you may receive a high interest rate. The lender may also have strict borrower requirements to weed out low-quality applicants.
Personal guaranty, UCC lien may be required
Though these business loans are considered unsecured, they may be secured with something other than collateral. A personal guaranty is a common requirement for unsecured financing. Signing a personal guaranty puts you on the hook to personally repay the loan if your business defaults on payments.
A lender may also place a general blanket lien on all of your business assets. With a general lien in place, the entirety of your business assets becomes collateral. Although you may seek an unsecured business loan to avoid offering collateral, you could still risk losing your assets if the lender requires a general lien to secure the funding.
Secured vs. unsecured business loans
The main difference between secured and unsecured business loans is the requirement of specific collateral. Secure loans must be backed with a certain asset, such as commercial property or vehicles, that a lender could seize and resell to recoup losses. As discussed, some unsecured loans come with a general lien placed on all assets — this means they don’t require a specific asset, but aren’t completely unsecured, either.
With both types of loans, you may risk losing assets, either one asset or all general assets. Although riskier, an unsecured loan offers a path to funding for business owners who may not have a single, high-value asset that a lender would accept as collateral on an secured loan.
Other key differences between the two types of financing include:
|Secured vs. Unsecured Loans: A Closer Look|
|Secured business loans||Unsecured business loans|
|Loan amounts||Loan amounts typically depend on the value of the collateral.||Loan amounts are usually smaller than secured loan amounts.|
|Terms||Longer repayment terms and lower interest rates based on collateral.||Increased lender risk often results in shorter payment terms and higher interest rates.|
|Approval||Because collateral reduces risk for lenders, applicants may have a better chance of approval.||Applicants may be subject to more scrutiny before being approved.|
|Time to funding||Individual assets must be appraised, slowing down time to funding.||With no assets to appraise, lenders may issue funds quickly.|
Since putting up collateral takes some of the risk out of the loan process for the lender, secured loans usually feature better interest rates and fewer fees than their unsecured counterparts. Unsecured small business loans are usually off-limits to businesses with low credit scores; however, if your business is in good financial standing, an unsecured business loan could be a good financing option.
Getting an unsecured business loan
To start the process of getting an unsecured business loan, you’ll need to gather the paperwork for your loan application. Different lenders have different business loan requirements, but it’s worth noting that online lenders typically require much less paperwork than traditional lenders.
In most cases, you will need to submit information related to your business performance, cash flow and personal and business credit history. Some application requirements may include:
- Operating history and time in business
- Business industry
- Financial statements, including cash flow and projections, profits and losses and balance sheet
- Recent personal and business tax returns
- Recent bank statements
After reviewing this information, the lender may reach out with some follow-up questions or requests for further documentation. It could take up to a month to receive an approval or denial from a traditional bank lender. Alternative online lenders move faster, and many will let you know the status of your application within about 24 hours. An online lender may also disburse funds to you as soon as one to two days after approval.
Where to find unsecured business loans
As discussed earlier, online lenders typically have more lenient requirements and faster time to funding than banks. Here are a few online lenders offering unsecured business loans that may be able to provide a financial solution for your small business.
Kabbage offers an unsecured business line of credit that business owners can draw from as-needed. Though you wouldn’t have to offer specific collateral, Kabbage does require a personal guaranty to secure the loan. Credit lines range from $1,000 to $250,000, with repayment terms spanning 6, 12 or 18 months. Kabbage charges a monthly fee from 1.25% to 10.00%, which would only apply to the money that you actually borrow from your line of credit.
Business loans from OnDeck are unsecured, but OnDeck does require a personal guaranty and places a general lien on business assets. OnDeck loans are available from $5,000 to $250,000 with repayment terms up to 18 months. APRs for OnDeck’s loans start at 35.10%.
Headway Capital offers an unsecured line of credit up to $100,000, but you would need to provide a personal guaranty. Headway Capital allows business owners to borrow from their line of credit as-need and offers repayment terms spanning 12, 18 or 24 months. You could also make payments on a weekly or monthly basis. Headway Capital does not disclose interest rates online.
Pros and cons of unsecured business loans
An unsecured business loan may seem like a low-risk option to finance your business — you wouldn’t have to pledge specific assets as collateral to back the loan. But an unsecured loan could come with other risks you may want to consider, such as high interest rates and the requirement of a personal guaranty. Keep these pros and cons in mind when considering an unsecured loan for your business.
Pros of unsecured business loans
You won’t risk losing a specific business asset that acts as collateral.
The application process is typically simpler than it would be for a secured loan.
Time to funding could be fast, since the lender wouldn’t need to appraise collateral.
Cons of unsecured business loans
Without the security of collateral, lenders often charge higher interest rates for unsecured business loans.
Repayment terms may be short, giving you less time to generate money to pay off your debt.
Unsecured loans may require a personal guaranty (which would make you personally liable for debt) or a blanket lien (which would allow lenders to seize any of your business assets if you default on loan payments).
FAQs about unsecured loans
What are unsecured business loans?
Unsecured business loans are a form of financing that provide a lump sum of capital without requiring you to pledge specific assets, such as commercial property, as collateral. Secured loans, on the other hand, require business owners to offer an individual asset to back the loan and the lender could seize that asset upon default.
Can you get a business loan without having any collateral?
Yes, you could be approved for an unsecured business loan even if you don’t have any collateral to offer to back the loan. Keep in mind, however, that a lender may require you to sign a personal guaranty if you don’t have any collateral. A personal guaranty would make you personally responsible to repay the loan if your business defaults. Some lenders may also require a general lien as collateral.
How can I get a business loan with no personal guaranty?
You may have better luck avoiding a personal guaranty if you take out a secured business loan instead of an unsecured one. Lenders typically require a personal guaranty with an unsecured loan to ensure they could still recoup losses without the ability to seize collateral. If you have collateral that could back a secured loan, you may not need to provide a personal guaranty.