Small-business loans typically require personal or business collateral, including real estate, equipment, cash in a savings account or other assets. But if you don’t have collateral to pledge for the loan or don’t want to put personal assets on the line, you can find no-collateral business loan options.
Unsecured business loans can be tougher to qualify for and may carry higher interest rates than secured loans, but they have less risk for borrowers. What you’ll learn here:
- How do unsecured business loans work?
- Where can you get an unsecured business loan?
- How can you choose the best unsecured business loan?
U.S. News conducted an in-depth review of the top small-business loan companies to recommend the best alternative lenders offering unsecured business loans. Recommendations are based on key factors, including customer service ratings, collateral requirements and loan options.
Best for large loan amounts
Established in 2013, Fundbox has served more than 70,000 small businesses with loans backed by investor partners. Borrowers can obtain revolving lines of credit of up to $100,000.
Best for quick disbursement
TD Bank offers small-business loans in 15 states and Washington, D.C. Several loan options are available, including term loans, lines of credit, commercial mortgages and Small Business Administration loans.
Established in 2013, BlueVine has delivered more than $9 billion in financing to more than 200,000 customers. The entrepreneurial lender focuses on small businesses, offering business lines of credit up to $250,000 and invoice factoring with credit lines up to $5 million. BlueVine also offers an online vendor and bill payments program and business checking account. The lender serves borrowers across the country and has three brick-and-mortar locations in Redwood City, California; Gretna, Louisiana; and Jersey City, New Jersey.
Best for product availability
Rapid Finance is an online financial services company that provides small business loans, lines of credit, merchant cash advances and other loan products. Rapid Finance’s small business loans can range from $5,000 to $1 million, and you can get funds to your business bank account within hours of your application and approval.
Best for loan options
Biz2Credit was founded in 2007 as a platform to match small businesses with funding based on their needs by connecting borrowers with lenders that offer a range of loan and credit options. The platform has arranged more than $3 billion in small business financing for thousands of U.S. companies.
Unsecured business loans don’t require collateral. Unlike other small-business loan options, unsecured business loans allow you to borrow without pledging real estate, equipment, or other personal or business assets as a guarantee.
“An unsecured loan can provide essential financing for a business that is facing a crisis or an opportunity,” says Gerri Detweiler, credit expert and co-author of “Finance Your Own Business: Get on the Financing Fast Track.”
Types of unsecured small-business loans include:
Term loans: Your small business receives a lump sum upfront and repays it, with interest, at fixed intervals over a set amount of time. Term loan uses include purchasing equipment or inventory, meeting payroll, and funding working capital, among others.
Short-term business loans may be available, but they can be challenging to get if you have shaky finances or your business lacks credit history.
Business lines of credit: These unsecured revolving lines of credit work similar to credit cards. You can borrow up to a limit and will be charged interest only on the funds you draw from the account. You can use a business line of credit to meet short-term needs, such as funding working capital, filling in cash flow gaps or growing your business.
Riskier Unsecured Financing Options
Invoice financing: This can be a solution for small businesses struggling with cash flow because of unpaid invoices. With invoice financing, you sell your unpaid invoices to a lender for quick access to cash and typically get about 80% of what the invoices are worth. The lender will then seek payment for the full value from customers.
Beware invoice financing fees. While invoice financing is easy to secure, the fees can add up quickly. Carefully consider the costs to decide whether it is worthwhile.
Merchant cash advances: A merchant cash advance gives you a single sum of cash for a portion of your forecasted sales. You will repay the advance, plus any fees, as a percentage of your future credit and debit card sales, deducted daily or weekly until the amount is repaid in full. Because they normally have interest rates that can hit triple digits, merchant cash advances are often not a sound choice.
Unsecured business finance options work like traditional small-business loans, except that you aren’t required to offer collateral. Not every borrower can put up collateral for a small-business loan.
Many alternative lenders make small-business loans that don’t require collateral. Instead, they offer unsecured loans based on the creditworthiness of you or your business.
Banks or credit unions may offer unsecured term loans or business lines of credit, but you’re most likely to find an unsecured business loan from an alternative lender. Alternative lenders are typically financial technology firms, or fintechs, that use automated technology to determine your creditworthiness, and some may charge higher interest rates than traditional lenders.
Using an alternative lender is usually better than turning to credit card debt, says Phillip Russo, senior business consultant with the Louisiana Small Business Development Center at the University of Louisiana at Lafayette. Alternative lenders can also have less red tape than commercial lenders.
“The application process is usually easy, fast and does not impact your credit score,” Russo says. “Typically, the loans are unsecured and can accommodate small startup expenditures and working capital.”
Unsecured business loans may be a good choice for small businesses that don’t have collateral or well-established credit.
Typically, unsecured business loans are more expensive than traditional business loans, but that doesn’t make them a bad option.
“If you need money fast to take advantage of a great opportunity, then it can make sense,” Detweiler says. “Or if you have a crisis that can be overcome – not made worse – by a short-term loan, it makes sense.”
Consult a financial advisor or your accountant to determine whether unsecured financing could make sense for your firm.
When choosing the best unsecured business loan, pay attention to the lender’s eligibility requirements, unsecured loan options, costs and customer service ratings. Keeping these factors top of mind will help you find the best options.
Don’t waste time and money with a lender that ultimately won’t approve your application. Look for these basic eligibility requirements to determine whether a lender is likely to offer you a loan:
- Minimum credit score requirements. Lenders may review your business and personal credit scores.
- Minimum time in business. Most lenders require at least two years in business.
- Minimum annual revenue. If you find a lender that will extend unsecured financing to your startup, expect your creditworthiness and projected annual revenue to come under strict scrutiny.
Loan types: Narrow your search to lenders that offer the type of loan you’re seeking, whether that’s a term loan, business line of credit, invoice financing or merchant cash advance.
Loan limits: Find a lender that will issue unsecured business loans in the amount you need. A loan that is too small could burden you with payments you can’t keep up with and neglect to meet your capital needs.
Term lengths: Unsecured business loans typically have shorter repayment periods than secured loans, which means higher monthly payments. Look at not only the repayment period but also the frequency of payments.
A loan that costs less in the long run is typically the best for your business. Carefully review all costs as you shop for a loan, including:
- Interest rate.
- Down payment.
- Origination fee.
- Additional fees.
Watch out for online scammers as well. They often make credible-looking sites designed to trick you into sending them money for a loan that never materializes.
“They can feel like a breath of fresh air because they will approve your application when others won’t,” Detweiler says. “But then they require you to send them money upfront to cover ‘the first three monthly payments’ or ‘insurance.'”
One red flag is if the lender never asks about your credit history because a credit review is always part of the application process. You can check with your state attorney general’s office to verify that the lender is authorized to make loans in your state.
- You don’t need to provide collateral.
- You won’t risk losing your collateral because the loan doesn’t require it.
- You can get funding quickly because unsecured loans have short approval times – sometimes as little as one day. Approval for other forms of financing, such as a secured business loan or a Small Business Administration loan, could take a month or longer.
- Higher interest rates and shorter repayment terms can be expected with unsecured loans for lenders to justify the risk of financing without collateral.
- Loans could be harder to qualify for without collateral. Your business credit score and annual revenue as well as financial statements, business plans and cash flow projections will be scrutinized.
- Lenders may require a personal guarantee, which means you will repay the loan with your personal assets if the business can’t make its debt payments.
- Amounts may not be as large as you need because lenders tend to approve smaller loans to avoid risk.
If you are in a rush to get business financing, you might miscalculate the right loan amount for your budget or make other errors. Exercise these precautions to prevent costly mistakes when taking out unsecured business loans:
Craft a thorough business plan.
Writing a detailed business plan is essential to getting any type of business loan. The lender will look carefully at the strengths and weaknesses of your business, including your credit trade lines with other businesses, business bank account statements, profit margins, and revenue projections.
Make sure your personal finances are in order.
Your personal finances often come into play when you are being considered for an unsecured business loan. A high personal credit score can help you secure a loan.
Check and improve your personal and business credit scores, if necessary, before you apply for an unsecured business loan, Detweiler says. While you might qualify for financing with a low minimum credit score, you will have better, more affordable options with good credit.
Plan how you will use the funds.
The purpose of the loan should fit the duration and the type of loan. For instance, an unsecured business line of credit can be an appropriate option to provide capital for short-term expenses such as payroll while waiting for customers to pay. A term loan for equipment that will be paid off in three to five years, when the equipment life has expired, is also an appropriate type of financing.
Prepare for a short repayment period.
Carefully assess the profitability and the cash flow of your small business. Do the math and make sure you can manage the payments.
Before getting an unsecured business loan, evaluate the costs and the benefits. On one hand, you won’t need collateral and can be approved quickly. On the other hand, unsecured business loans are typically costlier for borrowers compared with their secured peers: Expect higher interest rates and personal guarantees.
If you find that an unsecured business loan may not be the best fit for your needs, consider other options. You could look at whether a secured line of financing could make more sense, for example, if you have collateral you can offer.
Explore creative financing options for your small business. That could include crowdfunding, asking friends and family members for a loan, or using a co-op business structure, which allows investors to have a say in decisions and share profits.
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