Best Unsecured Business Loans of 2021 | U.S. News

Small-business loans typically require collateral, which can be business or personal, and include real estate, equipment, savings, 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 have 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:

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.

Unsecured business loans don’t require collateral to secure the loan. Unlike other small-business loan options, you won’t pledge real estate, equipment, or other personal or business assets to secure it.

“An unsecured loan can provide essential financing for a business that is facing a crisis or an opportunity,” says Gerri Detweiler, education director for Nav, a small-business financing resource.

Types of unsecured small-business loans typically available include:

Term loans: Term loans provide small businesses with a lump sum of working capital, which is a loan paid back over a set amount of time with an agreed-upon payment schedule. Short-term business loans may be available, but they can be challenging for a small business or a startup because of larger payments.

Business lines of credit: With an unsecured business line of credit, a lender approves you for a revolving line of credit. An unsecured business line of credit works similar to credit cards; there’s a maximum limit you can borrow, and you’ll be charged interest only for the amount of money you borrow. You can use a business line for working capital, filling in cash flow gaps or growing your business.

Riskier Unsecured Financing Options

Invoice financing: Invoice financing can be a working capital loan for small businesses struggling with cash flow issues because of unpaid invoices. With invoice financing, you sell your unpaid invoices to a lender at a discount, typically about 80% of what the invoices are worth.

The lender will seek payment for the full value from customers. While invoice financing is easy to secure, the fees can add up quickly, so small-business owners should carefully consider the costs.

Merchant cash advances: A merchant cash advance offers quick access to capital with a single sum of cash for a percentage of your forecasted sales. You will repay the advance, plus any fees, with either a portion of your future credit and debit card sales, or fixed daily or weekly transfers from your business bank account. 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 you aren’t required to offer a form of collateral. Not every borrower is in a position to 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.

Alternative lenders are usually a better option than turning to credit card debt, and they can offer less red tape than a commercial lender, explains Phillip Russo, senior business consultant with the Louisiana Small Business Development Center at the University of Louisiana at Lafayette.

“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 ratings.

While there are drawbacks to unsecured business loans – particularly that they can be more expensive than traditional business loans – unsecured business loans aren’t necessarily a bad thing.

“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.”

Advantages of Unsecured Business Loans

They can be easy to obtain: Unsecured business loans are easier to obtain than secured business loans and typically offer a faster application process and funding. Some deliver funds as soon as one business day, or the next business day.

Approval can be quick: Unsecured business loans usually have faster approval times than secured loans. Some lenders approve unsecured business loan applications in as little as 24 hours. Other forms of financing, such as a secured business loan or a loan guaranteed by the Small Business Administration, can take a month or longer to be approved.

You may have restrictions on usage: Unsecured business loans typically don’t have many restrictions, aside from not using the financing for illegal activities, gambling or buying securities.

Losing your collateral can be harder to do: While a lender can seize collateral with a blanket lien if your business defaults on a secured loan, the lender must have a court order to take your business or personal property.

Unsecured loans may be discharged in bankruptcy: If your business files for bankruptcy, the court may discharge unsecured loans. Secured loans are typically not discharged.

Disadvantages of Unsecured Business Loans

Personal guarantees are required: With an unsecured business loan, lenders typically ask for personal guarantees. While you don’t need to provide a specific asset when you sign up for the loan, you are still personally responsible for paying back the loan if you have a personal guarantee.

You could pay a high interest rate: Unsecured business loans are riskier for lenders, so interest rates on unsecured business loans are often higher than on secured business loans. Your business will likely pay more for interest over the life of an unsecured loan than a secured loan of the same amount with a lower interest rate.

They usually feature shorter repayment terms: Unsecured business loan repayment terms are usually shorter than those of secured business loans and may require more frequent payments, which means you should be prepared to pay off the loan quickly. Secured business loans may offer more flexible repayment options.

They tend to have stricter qualification requirements: Qualifying for unsecured business loans can be difficult. If you or your business have bad credit, the lender isn’t likely to approve your application.

However, some lenders don’t weigh credit score requirements as heavily and look primarily at your business’s annual revenue, Detweiler explains. For example, you may qualify based on annual revenue from credit card or online sales and get an advance on those funds.

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 in the application process with a lender that ultimately won’t approve you. Look for these basic eligibility requirements to determine whether a lender is likely to offer you a loan:

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 offer unsecured business loans in the amount you need. A loan that is too small could burden you with payments you may have trouble keeping up with while neglecting to sufficiently address your capital needs.

Term length: Unsecured business loans typically have shorter repayment periods than secured ones, which means higher monthly payments. You’ll want to look not only at 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 of the costs involved as you shop for a loan, including:

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.’”

A lender should look at your credit history during the application process, and it’s a red flag if the lender doesn’t ask about it. Also, check with your state attorney general’s office to verify that the lender is authorized to make loans in your state.

If you need money in a pinch and an SBA loan or financing from a traditional lender isn’t an option, proceed with caution when obtaining an unsecured business loan. Overextending yourself is easy to do, especially if you need the financing sooner than later.

Here’s how to prevent making 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.

Small-business owners must ensure that their personal finances are in order, as this can often come into play when being considered for an unsecured business loan. A high personal credit score can help you secure a loan.

While you might qualify for an unsecured business finance option with a low minimum credit score, you’ll have better, more affordable options with good credit. Check and improve your personal and business credit scores before you apply for an unsecured business loan, Detweiler advises.

Plan how you will use the funds.

The duration and type of loan should match the purpose of the loan. For instance, an unsecured business line of credit can be an appropriate option for small-business owners who need capital to cover short-term expenses such as payroll while waiting for customers to pay them.

Or if you’re planning to buy a piece of equipment you’ll use for the next three to five years, a term loan that’s paid off when it’s done being useful is an appropriate type of financing.

Prepare to handle short repayment periods.

Because unsecured business loans typically have shorter repayment periods than other forms of financing, do the math and make sure you’ll be able to manage the payments. Carefully assess the profitability and the cash flow of your small business.

Before getting an unsecured business loan, weigh the costs against the benefits. While unsecured business loans don’t require collateral and have a quick approval process, they are typically costlier for the borrower, with 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. For instance, if you have collateral you could offer but were reluctant to make it available, a secured line of financing could make more sense.

You can also think of creative ways to tap into financing. 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.