How to Choose the Best Unsecured Business Loan
- Loan Features - Loan amounts and terms vary from lender to lender. We made sure to include a variety of options to make sure your small business gets the financing it needs.
- Application process - We looked at how long the application process takes, along with whether a hard or soft pull is done on your credit.
- Interest rates and fees - Unsecured business loans often have higher rates than secured loans due to their risk level. We looked at interest rates and origination fees, along with whether or not there was a penalty for paying off the loan early.
- Qualification process - Different lenders have different qualification requirements, including minimum credit scores, monthly or annual revenue amounts, and total length in business.
- Customer support - If you have a question, how will the lender answer it? What are their business hours and what kind of multi-channel support do they offer? We looked for lenders with excellent customer service support ratings that are easy to get ahold of.
- Online user reviews - We spent some time reading independent review sites like Trustpilot to see what users have to say about the business overall. For example, does customer service offer helpful support and are the fees transparent?
- Perks and Bonuses - What extras does the company offer for being a borrower? We considered specified service offerings like payment flexibility, advertising transparency, and advanced technology.
What Is an Unsecured Business Loan?
Unsecured business loans are a type of funding that requires no collateral to borrow. The provider will loan you a lump sum of money, usually at a fixed rate of interest, which you’ll typically pay back over a period of one to five years.
Lenders also offer unsecured lines of credit. Rather than receiving one lump sum like you would with a term loan, you receive access to a revolving line of credit. With this type of funding, you only pay interest on the amount of money you borrow.
Many online lenders provide simple applications and quick decisions, with funding for approved loans provided in as little as 24 hours. If you have a good credit score, you can find reasonable rates, but options do exist for those with poor credit, too.
Types of Unsecured Business Loans
There are many different types of unsecured business loans, including:
- Term loans: These are the most well-known types of loans. You borrow a specified amount of money with the promise to pay it back over a set period of time, referred to as the term of the loan. You receive the money in one lump sum and payments are made regularly, usually monthly.
- Business lines of credit: These are lines of credit specifically for a business instead of a house. They function similarly to credit cards. You qualify for a certain amount of money and can withdraw it as you need it throughout the set draw period. You only pay interest on the money you actually use.
- Merchant cash advances: This is a type of unsecured business loan for businesses that have debit and/or credit card sales. The lender loans the business money as a lump sum and then gets repaid through future sales. Normally, the lender will automatically take their payments from your account either daily, weekly, or bi-weekly.
- Invoice factoring: A business sells their outstanding invoices to a factoring company for a lump sum, which is a percentage of the invoices. The company gives you funds quickly so you don’t have to wait on your customers to pay their invoices.
How Unsecured Business Loans Work
An unsecured small business loan is one of the simplest and most flexible ways to raise capital. The absence of a collateral pledge simplifies the application process.
The way unsecured business loans work is straightforward. Once a business has determined how much they need to borrow, it’s a question of looking at the monthly payments that will be required.
There’s some flexibility here, especially with regard to the term. By structuring the loan over a longer term, the monthly payment can be reduced. However, the longer the term, the higher the total interest cost you’ll incur on the debt.
How to Get an Unsecured Business Loan
One of the best things about unsecured small business loans is how easy it is to apply for them. The first thing to do is to look around for the best small business loans available. Generally, these will be the ones with the lowest interest rates, but other criteria can apply.
Once you’ve assessed your options and applied, you’ll need to provide documentation. Documentation typically includes, but is not limited to:
- Business tax returns
- Bank statements from the previous few months
- Personal financial information
- Income statement
- Balance sheet
After everything has been checked and approved, the money will be released within 24-72 hours of loan approval.
Here is exactly what it takes to get a business loan
How to Prevent Mistakes when Applying for Unsecured Business Loans
- Have a clear business plan - A business plan serves many critical purposes. Beyond facilitating financing arrangements, it serves to guide your business and inform your strategic and financial decisions.
- Have a purpose for your funding - Don’t borrow for the sake of it. Make sure you have a specific reason to apply for a loan. This will help you get approved and ensure you’re spending cash in a sensible manner.
- Always be honest in your application - Don’t try to inflate your financial performance in the hopes of securing more funding. Always be honest, and maintain a prudent debt load.
- Don’t apply last-minute - Unless it’s an emergency, you should apply for funding well in advance of needing it. Some applications can take longer than expected; applying early means you won’t be left hanging.
Unsecured Business Loans Pros and Cons
- Short application process - Since you’re not securing your loan against any assets, the application process is usually quite straightforward. Simply complete an online form and provide the relevant documentation. If you’ve been approved, you could receive funding that very same day.
- Less risky than other types of lending - If you default on your payments, none of your business assets will be seized. Of course, you’re still obligated to repay the debt, but you won’t lose any vital business equipment.
- Build credit history - Borrowers with poor credit can use low-dollar, short-term, unsecured lending to boost their credit scores.
- Flexible borrowing values - Since unsecured loans aren’t constrained by the value of an asset, you can often find very flexible borrowing limits, assuming you satisfy key criteria.
- Higher interest rates - Without any collateral to back the loan, the lender is taking greater risk. This usually translates into higher interest rates.
- Can be hard to qualify - Lenders usually only approve applicants with good credit and a history of strong business performance. However, with a little shopping around, you can find some poor credit options.
Unsecured loans are a great way to take your business to the next level. If you need financing to pay wages, cover operating expenses, or expand your business, an unsecured small business loan can help. Online lenders, such as the ones mentioned above, provide easy applications and fast funding times, giving you the cash you need as quickly as possible.