Key Takeaways
There are many different types of unsecured business loans, including term loans, business lines of credit, and SBA loans under $50,000. Unsecured loans can be used to purchase inventory, existing businesses, equipment, real estate, etc. Even unsecured business loans may require you to sign a personal guarantee backing the loan with your personal assets.
Unsecured business loans help businesses borrow money without putting up valuable assets as collateral, which can be hard to approve because they pose a higher risk to lenders.
According to the 2023 Small Business Credit Survey, business lines of credit have the highest chance of being approved: 46 percent of employer businesses that applied were approved in full, compared to 38 percent for business loans and 35 percent for merchant cash advances. There are many types of unsecured business loans, so you should explore each option to choose the type that best suits your situation and business needs.
Long-term loans
A term loan is a loan that you pay off in a lump sum up front, usually on a monthly payment schedule, over a set period of time. Repayment terms can be short-term, up to 24 months, or long-term, from 5 to 10 years.
Short-term loans offer the chance to pay off your loan faster, but they usually have higher interest rates and fees. Long-term loans have lower payments but you'll pay interest over a longer period of time. You may also incur prepayment penalties if you pay off your loan early.
The advantage of a term loan is that it has predictable payments, often at a fixed interest rate. These consistent payments allow you to plan the exact amount you'll pay back each month, making the loan easier to manage. Term loans are best for large, one-time purchases, since you'll need to reapply for a new loan if you need more funds in the future.
Business Lines of Credit
A business line of credit provides funds that a business can access as needed, up to a set credit limit.
Most business lines of credit are revolving, meaning that as you pay back the amount you borrow, your line of credit is replenished, giving you access to more funds.
A business line of credit can help provide funds to cover unexpected expenses or erratic cash flow, but many lines of credit have lower borrowing limits than a term loan, such as $250,000 or less, depending on your company's eligibility.
Unsecured business lines of credit may also have variable interest rates that can increase unpredictably over time, increasing your borrowing costs and repayments, and the interest rate on a line of credit may be higher than the interest rate on a term loan.
Invoice Factoring
Invoice factoring is a type of financing that relies on the value of your unpaid invoices. You sell your unpaid invoices to a lender and receive an advance, usually up to 90 percent of the invoice amount. The factoring company then collects the invoices. When the invoices are paid, the company pays you the remaining amount of the invoice, minus a fee.
This type of unsecured business loan is useful for businesses that issue invoices to customers. Invoice factoring allows you to raise funds to cover operating expenses without having to wait 30 to 90 days for customers to pay your invoices. And because it relies on the creditworthiness of the customer, not the business, even borrowers with poor credit can qualify.
However, invoice factoring tends to come with high fees that increase the longer an invoice remains unpaid, and the fees are deducted from any outstanding invoices. Also, you can't borrow more than the amount of your invoice, so this option is usually an option if you can't qualify for other types of financing.
Merchant Cash Advance
While not strictly a business loan, a merchant cash advance provides quick funds as a down payment on future debit or credit card sales. MCAs tend to have looser application qualifications and accept businesses with poor credit and low revenue.
However, MCAs have strict repayment terms and typically require you to repay a percentage of your daily or weekly sales. MCAs are also known for charging hefty fees in the form of factor rates, and APRs can be more than 50 percent.
A rate multiplier uses a multiplier, such as 1.10 or 1.50, to calculate the upfront cost of a loan. For example, if your rate multiplier is 1.5, and you borrow $12,000, the cost of the loan will be $6,000 ($12,000 x 1.5 = $6,000).
Using a business loan calculator, you can see that this amount is roughly the same as a $12,000 loan with a 41 percent annual interest rate and a 24-month repayment term, or a loan with an 80 percent annual interest rate and a 12-month repayment term. When comparing loans by factor rate, convert the factor rate to an interest rate to help you consider the loan cost.
1.5 Factor Rate 41% APR 80% APR Loan Amount $12,000 $12,000 $12,000 Loan Term 12-18 Months 24 Months 12 Months Loan Cost $6,000 $5,777.97 $5,809.16 Total Loan Amount $18,000 $17,777.97 $17,809.16
business credit card
Like a business line of credit, a business credit card allows you to claim expenses up to a set credit limit. Business credit cards are usually easier to apply for than business loans because credit card companies primarily use your personal or business credit score to make their decision.
Business credit cards often come with perks like cash back on purchases and a 0 percent introductory APR period. Plus, you won't pay interest on purchases if you pay off the balance in full each month.
However, unsecured business credit cards tend to be reserved for borrowers with good to excellent credit. If you have fair or poor credit, you may need to use a secured card to build your business credit history.
SBA Loans
An SBA loan is a term loan or line of credit guaranteed by the U.S. Small Business Administration. If you default on your loan repayments, the SBA guarantees repayment to the lender up to a certain percentage. SBA loans are designed for businesses that don't qualify for traditional loans and are offered through approved lenders.
However, it is very popular due to its long repayment period and low maximum interest rate. The approval process can take 30-90 days, so you will need to be patient when applying for this loan. Also, SBA loans are only available unsecured and for loans up to $50,000. For amounts larger than that, you may be required to provide collateral to back the loan.
What can I use an unsecured business loan for?
Unsecured business loans can be used for a variety of purposes. The type of loan you choose will depend on your reason for funding. You can use an unsecured business loan if:
Purchasing new or used equipment Purchasing inventory Financing start-up costs Acquiring an existing business Paying bills during times of unstable cash flow Purchasing real estate for an office or shop Refinancing previous business loans Consolidating business loans Building credit
Bankrate Insights
Depending on the loan type and lender, funding can take anywhere from a few days to a week. If you need quick funding, consider one of the top online lenders that offer funding within 24 to 48 hours.
Conclusion
Choosing the right type of unsecured business loan will depend on your business's financial situation and how you want to use the funds. The best unsecured small business loans offer low interest rates, favorable repayment terms, and low fees.
Once you have chosen the type of loan, you should compare lenders and get pre-qualified or apply for multiple loans to see which one gives you the best offer. You should also make sure that the loan payments fit into your budget so that you can get a good handle on your business loan.
However, while unsecured business loans don't require collateral, you may need strong credit and revenue to qualify. If you can't fully meet the requirements, consider a secured business loan or alternative financing to get the funds you need.
FAQ
Will banks give me a business loan without collateral?
Yes, many banks offer business loans without collateral, but they tend to have stricter qualification requirements when applying for a loan, such as having been in business for two years and having annual revenues of at least $200,000.
Can I get an SBA loan without collateral?
Yes, most SBA loan programs allow you to take out a loan without collateral, but you are usually limited to loan amounts of $50,000 or less. Beyond that, lenders use their regular collateral policies to determine how much collateral you need to back your loan.
How hard is it to get an unsecured business loan?
Obtaining an unsecured business loan is usually more difficult than obtaining a secured loan. Because the loan is not secured by assets, it is riskier for the lender. To offset the risk, lenders may tighten their lending requirements and charge a higher interest rate than for an unsecured loan. If your business finances are weak or your credit is poor, consider online lenders with looser application requirements.