Fundamentally, there are two major categories in which small business loans can be defined – secured and unsecured business loans. Understanding the difference between the two and what is an unsecured business loan is an important step in defining if it’s the best financing option for a business. In this guide, we will cover exactly that; what an unsecured business finance is, how to get an unsecured SME loan, the different types of unsecured business loans, and the best unsecured business loans available in the U.S.

As a small business owner, it’s likely that you’ve found yourself in need of additional financing at some stage of your life cycle. Understanding the ins and outs of secured and unsecured business loans can be the difference between a safe cash injection and a costly financial miscalculation.

A secured loan will see default risk lie with the borrower. Whilst an unsecured business loan shifts some of this risk to the lender.

So, What is an Unsecured Business Loan?

An unsecured small business loan is a type of loan issued by lenders that is supported only by the borrower’s creditworthiness, rather than by any type of collateral.

In a secured loan, you must provide collateral to the lender so that in the event your business is unable to repay the loan the lender has recourse on your collateral. If you fall behind on your payments and are ultimately not able to repay a secured loan then the lender has the legal right to recoup their money by repossessing and reselling the asset you used to secure the loan in the first place. The lender will then deduct the portion of your debt from the total and seek out legal recourse to get the remainder of what has been loaned to your business.

So what defines a business’ creditworthiness and whether they are eligible for unsecured small business loans? A company’s credit score is a factor but more so than anything, a lender will look to get a better understanding of the company’s current cash flow situation.

It’s rare for traditional lenders to approve unsecured business loans. Most of the unsecured financing solutions come from online lenders who provide seamless integration with your accounting software in order to gain a sound understanding of your business financials. Thus, unsecured loans are often tailored to individual circumstances and closely align with a company’s earning potential.

Unsecured Business Loans for Bad Credit

For this reason, it’s still possible to get unsecured business loans for bad credit businesses. Even if your company has a poor credit history, so long as your transactions look good to the online lender’s algorithm and the amount you’re seeking is relative to this too, then your business can still qualify for an unsecured business finance.

It’s important to note that with the growth of alternative online lending platforms in recent years, more and more lenders are starting to provide bad credit small business loans. Making the issue less and less relevant to finance applications.

Unsecured vs Secured Business Loans

Unsecured Business Loans

Secured Business Loans

Typically a smaller loan amount which is to be repaid over a smaller period of time. Fast application and processing times. Loans primarily based on business cash flow and credit score – no assets required. Likely to be more expensive with less preferential rates when compared to a secured business loan. Could require a personal guarantee from a director.

Require personal or business assets to be used as collateral against the loan. The amount you’re allowed to borrow could be dependent on the value of the assets. Should be cheaper than taking unsecured business loans. Can allow you to borrow more as a business than an unsecured loan. Can incur additional professional costs for having your asset valued. Will generally take longer than receiving an unsecured loan.

How to get an Unsecured Loan

The number of lenders providing unsecured business loans is growing in the US. Largely driven by the rise of FinTech’s who are challenging some of the traditional US banking ‘norms’. This, coupled with the rise in the variety of lending solutions being available to SMEs, means there are more unsecured funding options for SMEs than ever before.

Unsecured Business Loan Marketplaces

SMEs who don’t have a particular lender in mind may find applying with Become business loans the best course of action. Operating as a lender marketplace, Become is an online platform for US businesses to find and optimize funding solutions. The company provides businesses with tools to improve their fundability with its unique lending algorithm and the marketplace allows an easy comparison for businesses to find the best possible funding options.

Stipulating the type of loan you require – such as unsecured business loans or an SBA approved loan – is all part of the application process. Become then does the hard work of identifying only the most relevant companies from the top 10 business loan companies who provide the solutions to your business requirements.

Online Lenders & FinTech’s

Advances in technology have allowed new lending structures for some of America’s most innovative FinTech’s, such as Fundbox and LendingClub, who can raise capital with alternative investors, rather than traditional banks. Whilst other newly-launched working capital lenders don’t necessarily look to differentiate in their technological proposition but offer excellent customer service, fast application processes, and a quick lending decision.

Unsecured Business Line of Credit

It isn’t just straight-up business loans that you can receive as unsecured business loans either, businesses can also seek an unsecured business line of credit. You can find an unsecured line of credit available through Kabbage and other US lenders.

Businesses can even consider invoice finance or a merchant cash advance as a hybrid unsecured financing option. Which sees either the invoices due to your business or your daily merchant POS sales volumes act as security in the lending process. So whilst you are still providing security to the lender, this is based on future income from sales rather than specific business assets.

SBA Approved Loans

SBA loans, ranging from $500 to $5.5m, are backed by the US federal agency, the Small Business Administration. Due to the guarantee provided by the SBA, this type of business loan generally requires no collateral. Even new startups may get a loan with no need for collateral via the SBA.

If you’re looking for a relatively affordable form of lending, SBA loans are a good solution. To apply for an SBA loan will bring with it more formalities though, so you should expect this to add some time to the process, especially if you want a commercial construction business loan.

Business Credit Cards

As you will know, there are many, many different business credit cards available on the market.

When you consider some of these will come with a 0% introductory APR offer for the first year or so, then this can prove a sensible option for working capital liquidity.

These credit cards are essentially an interest-free working capital loan for the duration of the specified introductory period. Being aware when the promotional terms are up will be important so you can build a repayment plan which allows you to pay off the balance before you begin to accrue interest.

Unsecured Small Business Loans – What to Watch Out For

As we’ve already discussed, there are some distinct benefits to taking unsecured business loans when compared to a secured business loan, but as with anything, there are caveats to watch out for.

If your business requires a large amount of unsecured funding, you likely won’t be able to get as much had you applied for a secured business loan. As there is no collateral to back the loan, lenders are less inclined to provide large sums of money.

The lending process and decision will also emphasize the working capital of your business, so whilst there’s no minimum credit score you need for a short-term business loan like this, lesser cash flow and a low credit score will tell the lender that you may have a harder time in repaying the loan.

Defaulting on an unsecured business loan can still spell trouble for yourself and your business. Even though you haven’t formally put up any collateral, there are other ways that failure to pay back your loan could cause financial issues. If you default on an unsecured small business loan, your personal and your business’s credit score will take a blow and you could still lose assets. In the absence of providing business assets as security, the lender could still sue you and you may be required to make a personal directors guarantee to the lender in order to receive approval.

Most unsecured business loans, however, are issued and repaid with no issues. After all, the lender wouldn’t have lent via unsecured means if they didn’t believe the customer could repay an unsecured business financing

in the first instance. For businesses concerned with speed and ease then unsecured funding is certainly an avenue to consider and an unsecured business loan can prove the best solution. Whilst secured loans can mean hours of paperwork and asset valuations, unsecured business loan applications can generally be done online with a lending decision made within 24 hours. The best unsecured business loans will not always be the same solution for different businesses and SMEs will need to carefully consider a range of unsecured business loan companies and the unsecured financing options they offer.