Many company owners see unsecured business loans as a low-risk form of financing. These types of loan don’t require applicants to supply collateral which means it’s available to more people. Even if you don’t have a house or car to use as security, you will still be considered for an unsecured loan. For business owners that do own property but prefer not to borrow against it, this type of funding can also be appealing. But that doesn’t necessarily mean that it’s the right choice for everyone. As with all forms of financial products, there are pros and cons to weigh up. In this article, we discuss the ins and outs of unsecured business loans so that you can decide if they’re right for your needs.

What Are Unsecured Business Loans?

Unsecured loans are a form of business financing that doesn’t involve providing security. Most types of funding require the borrower to provide a personal guarantee that they’ll repay the money. These are known as ‘secured’ and require collateral as a guarantee. You can use personal assets (such as your house or car) or business assets (such as commercial property or equipment) as collateral. If you find yourself unable to repay a secured loan, then the lender can take your collateral and sell it to get their money back. This means that your home or other valuable assets are at risk if you fail to make the repayments. But with unsecured business loans, you don’t have this concern.

If you default on an unsecured loan, the bank isn’t automatically entitled to your possessions. This doesn’t mean that you’ll be able to walk away without any repercussions as they will want to recoup the money they’ve lost. But it does mean that business owners can sleep a little more soundly. With an unsecured business loan, they have the peace of mind of knowing that their personal assets aren’t on the line.  

Why Are They Useful?

Unsecured business loans are useful in a number of situations. They have become more popular in recent years, partly due to the increase in online businesses. In the US, online sales have been growing consistently year on year and are expected to exceed $4 billion by 2020. This has led to a new generation of businesses that don’t own traditional assets in the way that bricks and mortar operations do. They don’t have the typical forms of security or collateral that many financial institutions are looking for. There is no equipment, warehouse, or stock – physical products are drop-shipped and information products aren’t tangible. As the nature of company assets changes, more and more organizations are looking to unsecured loans as a funding option.

However, it’s not just online businesses that can benefit from unsecured finance. Here are the most common situations where this type of funding is a good option.

  • Business owners don’t want to use their own assets as security
  • The business doesn’t own collateral like equipment or physical stock
  • Assets are already being used as security for other financial products
  • A business wants quick cash and doesn’t have time for the asset review process

This last point is one that appeals to many business owners. Unsecured loans tend to be quicker to obtain as there’s less red tape involved. Because you don’t have to sign over assets or have them inspected, the application and approval process is markedly shorter. For companies that want to access funds quickly, these types of loan can be ideal.

There are also lots of different types of company that find unsecured business loans to be more suitable for their set-up.

  • Bricks and mortar businesses without assets
  • Software companies
  • Consultancy organizations
  • Information product businesses
  • E-commerce platforms that use drop-shipping
  • Companies with new business models that don’t fit traditional criteria

In the modern business world of tech enterprise and shoestring start-ups, there is less inclination to tie up cash in assets. Companies want liquidity so that they are flexible enough to take advantage of new opportunities. They want to be adaptable as markets and industries change, so they don’t necessarily invest in property, equipment, and product stock like the previous generations of business did. This means that unsecured business loans are one of the few lending products that are available to them.

What Can An Unsecured Business Loan be Used For?

Unsecured business loans can be used for many of the same purposes as secured ones. They are flexible enough to meet the varied needs of small and large businesses across the country. Here are just a few of the ways that these types of business loan are used.

  • As working capital to fuel the everyday running of a business
  • To aid cash flow until customers pay their invoices or new projects are agreed
  • Loans can be used to purchase new equipment or machinery
  • To pay for staff salaries or hiring new team members
  • Expanding into new premises or relocating into better venues
  • Investing in marketing to drive new leads, customers, and sales revenue
  • To tide seasonal businesses over during their quieter periods
  • Taking advantage of business opportunities such as buying out competitors
  • Purchasing new stock in advance or meeting minimum volume requirements for supplier discounts

Is a Business Loan Right For Your Business?

At this point, you might be asking yourself if unsecured business loans have any downsides. Since they’re suitable for so many needs, why doesn’t everyone just opt for them? But as with all financial products, there are pros and cons. In order to look at them objectively, it’s important to weigh up all aspects.

The biggest advantage of unsecured loans is that they don’t require collateral. For some business owners, this will give them peace of mind and help them to feel less stressed about their finances. For others, it will free up any assets they do own to be used in other ways. No-one expects to have issues repaying a debt but sometimes the unexpected happens. With unsecured loans, you can rest a little easier that you won’t lose your house if worst comes to worst.

However, with this benefit, there are some downsides. The lender needs to protect themselves against the increased risk of loss and they usually do this in three ways:

  • Offering smaller loan amounts since there is no security provided
  • Requiring higher credit scores because there’s no collateral as a guarantee
  • Charging higher interest rates and setup fees to mitigate the potential risk of loss

Despite these drawbacks, unsecured business loans tend to be more accessible than secured alternatives. They are also quicker to obtain – we can approve applications in as little as 24 hours. Since there is less paperwork and red tape involved, many business owners find them easier and less stressful to apply for.

However, if your company hasn’t been running for very long, then you may find it a bit more difficult to obtain business loans. When lenders can’t find a credit report, they’ll have nothing to base a decision on. Since unsecured business loans are seen as a high-risk product by most banks, new businesses will find it even harder to qualify for these. If this is the case, then it may be better to go for a merchant cash advance, credit card, or line of credit in order to build up your business credit history.

It almost goes without saying that it’s important to look at the financial small print. Make sure you understand the repayment terms so that you don’t fall foul of any hidden fees or early prepayment penalties. The loan duration can also significantly impact the amount of interest you pay so it’s worth calculating the total repayment amount. Short term loans with high interest over 12 months can actually end up cheaper than medium interest loans over 36 months. The devil is in the detail so work out the total amount that you’ll need to pay back before committing to an option.

An unsecured loan may seem like the lowest risk funding source for your business but it pays to do your research. The benefits are clear – there’s no collateral required which makes it more appealing to some companies. Those without assets may find that their options are limited to unsecured financing. But it can also be a practical choice for businesses that want the flexibility to use their assets in other ways. Or simply prefer the peace of mind that comes with knowing your home isn’t at risk.

Whichever type of loan you choose, it’s vital to keep up the monthly payments. This will ensure that you don’t fall into arrears which can significantly affect both your personal and business credit score. Getting funding will be 10x harder once you’ve fallen down this hole so it’s best to avoid it at all costs. But if you’re confident that you can meet the repayment requirements, then an unsecured loan can allow your business to flourish. If you need funding quickly, aren’t looking for huge loan amounts, and don’t want to waste time on endless application forms, then this option may be for you. It’ll give you the cash you need to expand, invest, or keep things ticking over as they should be.

Unsecured Business Loans from Strategic Capital

Strategic Capital provides unsecured business loans to a wide range of companies across the USA. Whether it’s to pay for your everyday costs, emergency repairs to equipment, or investing in expansion, we offer small business finance solutions without the hassle of traditional banks. Best of all, you’ll benefit from competitive terms and a simple application process, so you’ll soon have more money to reinvest into your business.

Transparency, innovation, and expertise are the driving factors behind everything we do. With a talented team of advisors, a plethora of funding partners, and the best technology available – we go above and beyond to help our clients receive their capital rapidly with the industry’s most competitive repayment options and interest rates. We want to break speed records, not bank accounts. Upon submitting your application, it’s reviewed by a dedicated Capital Advisor. We generate the best rates and terms at lightning speed through our funding matrix and robust lender network. Yep… it’s that simple.

Learn more about our unsecured business loans, invoice financing, business lines of credit, and merchant cash advances here.

Checking for pre-approval will not affect your credit score.