From hiring and firing, managing sales, recruiting customers, strategy, growth, purchasing, and so much more, it can seem like a never-ending stream of new things to learn and manage.
Business finance is one of those areas a small business owner must master (or at least get a handle on), and can often be extremely foreign to leaders who are more steeped in creative, sales, or design rather than a finance background.
In terms of small business financing, there are a wealth of new terms, jargon, and concepts that many small business owners need to learn on the fly.
While this article is by no means a comprehensive guide to small business funding, it is important to underscore and clarify one of the key sets of terms new small business owners are likely to encounter: secured and unsecured loans or credit products.
Understanding the difference between “secured” and “unsecured”, and all of the inherent implications for your small business funding, is critical to ensuring you get the most money you can, in the easiest and fastest way possible, at the lowest cost to your business.
It’s our goal in this article to help demystify these two terms, focus on the differences and similarities between secured and unsecured business loans, and highlight why so many small business owners, once informed and with the benefit of experience and hindsight, tend to prefer unsecured small business loans, often from private lenders, as their business funding of choice. So let’s get started!
Secured vs. Unsecured Loans – What the Terms Mean
Many people mistakenly believe that secured and unsecured, in reference to loans and financial products, have to do with our safe or, well, secure that loan or credit line may be.
This is an understandable attitude, since it seems like every week there is another news story about a data breach or high-profile hacking.
However, this is not at all what these terms mean, and a secured business loan is no more or less “safe” in terms of your personal and financial information than an unsecured business loan.
Rather, secure and unsecure (or secured and unsecured) in the context of loans and credit products refer to whether or not the lender has secured a guarantee of repayment of the loan, via collateral.
A secured loan is one in which the borrower has offered up sufficient collateral, appraised and valued by the lender, to serve as a pledge or guarantee of repayment of the principal and interest value of the loan should the borrower default, go bankrupt, or otherwise have trouble repaying the loan.
By contrast, unsecured business loans do not have any such guarantee for the lender, and do not require any collateral (though may sometimes require a personal guarantee from the borrower, a form of contract to repay the loan, including from personal assets or funds, should they default through the business accounts).
To put it another way, using financial concepts that are more familiar to most consumers, an unsecured small business loan is like a cash advance loan, in that you don’t need any assets pledged to the lender.
Repayment is expected on schedule and in the amounts specified, with interest, and the debt will still exist (and the lender will make all efforts to recoup their funds) in the event of bankruptcy.
On the other hand, secured business loans are more like a home mortgage, in that the lender has options to ensure they recoup their funds, even in bankruptcy – seizing the home associated with the mortgage, or, in the case of secured business loans, seizing the collateral pledged.
Collateral and Risk
As should be clear from the description above, the differences between secured and unsecured forms of small business funding all comes down to collateral. The collateral requirements also translate into a measure of risk, both for borrowers and lenders.
Business loans without collateral (unsecured small business loans) are riskier for the lender, but safer for the borrower. They don’t require you to gamble valuable assets – assets you might not even have – in order to secure the loan.
Because of the ways in which assets are valued for collateral purposes, many borrowers would need to put up assets whose market value may be several times the value of the loan in question.
There are few advantages to this proposition for borrowers – only a somewhat lower interest rate on secured business loans compared to unsecured business loans.
A secured, $100,000 loan balance on which you default could end up costing you half a million dollars worth of equipment, assets, or property, which you just purchased within a year or so of taking out the loan – exposing you to a much greater financial cost and loss than with an unsecured business loan.
On the flip side, secured business loans are lower risk for lenders, obviously. They have an asset-based guarantee of repayment, even if the borrower’s business fails or they default on the loan payments.
This means they can offer somewhat lower interest rates on secured small business loans compared to unsecured business funding.
It shifts the vast majority of the risk onto small business owners, who are already taking on significant risk simply by starting a small business or entrepreneurship.
In addition, because of the higher risk profile and collateral requirements for borrowers, lenders offering secured business funding only (which is commonplace at many commercial banks) tend to have extremely strict, hard-to-meet lending requirements, which effectively make it impossible for many newer or asset-poor small business owners to get the small business funding they so badly need to run their business.
Why Many Small Business Owners Prefer Unsecured Small Business Loans
For the reasons outline above, many small business owners prefer unsecured small business loans or other forms of unsecured business funding over secured ones.
It’s absolutely true that this means business owners pay somewhat more in interest expenses on their unsecured business loans. But, for many owners, this is a small extra cost premium to pay, with the tradeoff in savings on risk of collateral assets.
In practical terms, it can amount to something like an additional few dollars per $100 borrowed over the life of the loan, compared to risking the loss of a home, office, vehicle, raw materials, equipment, and so on.
The next logical question that many small business owners ask usually has to do with how to get a business loan without collateral – an unsecured small business loan.
Many banks, which are traditionally the first place one would go for a business loan, don’t offer unsecured loans, but rather only the secured variety.
This comes back to our earlier discussion of risk, in that banks who lend money seek to take on as little risk as possible, and set very stringent requirements for approving loans.
That’s why many small business owners have turned to private, non-bank lenders – specialists in unsecured business loans and unsecured business funding – who have emerged in the last decade to fill the gaps in the small business lending market.
They provide funding to companies without significant collateral, lower credit scores, and less time in business than would ever be accepted at most banks, and are much more tolerant of risk, especially in the small business lending space.
Unsecured Business Loans from BizFly Funding
Unsecured business loans from private lenders are, without a doubt, the preferred choice of a majority of small business owners in America today.
One of the leading private lenders, who deals exclusively in unsecured small business funding, is BizFly Funding.
They maintain very minimal requirements for qualifying for an unsecured small business loan, so that many newer businesses, or businesses with a thin credit file or bad credit score, can still qualify for funding.
Since no collateral is required, loan funds are often available in hours to days, compared with weeks to months with banks and traditional lenders. The application process is speedy, customer service is exceptional, and your odds of approval are excellent.
For these reasons and more, we encourage you to consider BizFly Funding as your source for unsecured small business loans for your business. To learn more about BizFly Funding, visit their website at https://bizflyfuinding.com!
Frequently Asked Questions about Unsecured Small Business Loans
The requirements to qualify for an unsecured business loan will vary depending on the lender you choose, as well as the specifics of your small business.
In general, however, most lenders – especially private lenders – offering unsecured small business loans and other unsecured business funding products, require you to meet a minimum credit score requirement, minimum time in business requirement (usually a few months), and a minimum monthly revenue requirement.
Larger loan amounts may have somewhat stricter standards, and some lenders may require you to give a personal guarantee on an unsecured business loan as well.
As with most things finance, the interest rates available to you on an unsecured business loan will vary based on market rates, your risk profile, how much you are seeking to borrow, the lender you choose, and many other factors.
As a general rule, however, they are slightly higher than the rates available for an equivalent secured business loan (assuming your business would meet the requirements for one).
Rates in the high single digits to low double digits as a starting point for the most-qualified applicants are fairly common among private lenders offering unsecured business funding.
The key to maximizing your small business funding and minimizing the amount you pay in interest is to match the kind of small business loan or credit product you take out with the type and term of expense for which you need the funding.
Short-term expenses that will yield a return on the investment in short order are best served by shorter-term loans and credit products.
Ongoing and highly variable expenses often can best be met with a line of credit/revolving credit facility that keeps you in control to borrow just what you need, when you need it.
Longer-term projects or expenses may benefit most from a more standard small business loan, with a term of a few years. Other options may be more attractive depending on your credit situation, revenue situation, collateral availability, and so on.
Most banks who offer small business loans tend to only offer the secured version, rather than unsecured small business loans, due to risk.
As we discussed in our guide, secured loans are typically harder to obtain, require collateral, and may take considerably more time to get funded as well.
Private lenders, on the other hand, tend to offer unsecured small business loans and unsecured business funding products, with no collateral requirements, and can get your business funded fairly quickly.
While the credit score needed to obtain an unsecured small business loan will vary from lender to lender, and may vary based on other factors (revenue, time-in-business, loan amount, etc.), most leading private lenders today require credit scores of 600, 550, or even 500 and above.
This means that many small businesses, even those with bad credit or a limited credit history, can still qualify for unsecured small business loans.
By contrast, banks often require scores of 700, 750, or even higher for their secured small business loans.