For the uninitiated, these terms can be confusing. It may not be immediately clear what the differences are between these two loan types, and what the pros and cons are for each.
Unsecured business loans tend to be preferred by most small business owners over their secured counterparts. We’ll explain the differences between these two loan types, and why that is the case.
Specifically, we’ll look at the benefits and drawbacks associated with unsecured small business loans, and provide some information (and answer some questions) to help you decide if an unsecured business loan is right for you and your business.
Secured vs. Unsecured Business Loans
In the simplest terms, secured vs. unsecured business loans differ on the basis of collateral. Secured loans require collateral, whereas unsecured business loans do not.
The “security” is not a measure of how safe or reputable the loan or the lender may be in each case. Rather, it is a matter of whether or not the debt – the principal and interest of the loan – is secured for the lender.
Collateral-backed loans ensure that the lender will be repaid, even if the borrower defaults, because they have a right to seize the collateral in that case. Unsecured business loans do not have such a guarantee.
This results in somewhat different pros and cons for each of these two loan types, which are often complementary to one another (where something is a negative for a secured business loan, it’s a positive for an unsecured business loan, and vice versa).
The Benefits of Unsecured Business Loans
Unsecured small business loans are often seen as the ideal form of small business funding. Secured loans protect the lender, whereas unsecured loans protect the borrower.
There are several reasons for this, that collectively constitute the benefits of unsecured business loans.
This protects the borrower to a much greater extent than with secured loans. Because of the way that collateral works and is valued, borrowers on secured loans often have to put up collateral worth several times the value of the loan being taken out.
This can mean putting up as much as $50,000 in collateral for every $10,000 borrowed. If you default on the loan, you’re out the full $50,000 in collateral – a massive risk as the borrower.
Unsecured business loans do away with that substantial risk, meaning if you default, you’re only on the hook for the $10,000 you borrowed (plus interest, less any repayments already made).
Secured business loans that require collateral must have the collateral inspected and valued by the lender. This process, along with attendant paperwork, can drag out the loan application to several weeks at a minimum, and over a month in many cases.
By contrast, unsecured small business loans don’t have this extra lengthy step, and can often provide businesses with small business funding within days or a single day.
Generally speaking, secured loans are more typical at banks and traditional lenders. Unsecured business loans are more common at private, non-bank, alternative lenders, like those that operate online.
In many cases, unsecured small business loans are much easier to qualify for, with minimal time in business, monthly revenue, and credit score requirements.
That means unsecured small business loans for bad credit customers can be an ideal (and often only) source of small business funding.
The Drawbacks to Unsecured Business Loans
Of course, there are also some drawbacks to choosing an unsecured business loan as opposed to a secured one.
But, they provide access to hundreds of thousands of dollars of potential small business loans that can be exactly what many small business owners need.
Typically, bad credit business loans provide up-front lump-sum proceeds for the business, and are then repaid, along with interest, over a specified time period. There are also other bad credit business finance options that are slightly different in their function, repayment schedule, and ideal uses.
These drawbacks primarily include:
In many cases, you may not be able to obtain unsecured small business loans that are as large as secured small business loans. The risk to the lender is higher, and as such, their maximum loan amount, or the loan amount for which your business may be approved, can be smaller than if you went with a secured loan.
Unsecured business loan rates tend to be higher than their secured loan counterparts. This is because without the security of collateral, the risk to the lender is significantly higher.
Like most financing and loans, the higher the risk for the lender, the higher the interest rate will be for the borrower. For many businesses, however, the slightly higher unsecured business loan rates are more than worth it to avoid risking 3-5x the value of the loan in collateral.
The Bottom Line: Unsecured Small Business Loans for Your Business
Ultimately, you’ll have to decide whether or not an unsecured small business loan is right for your business. If you don’t want to risk collateral, and are happy to pay slightly higher interest as a result, it might be a good fit.
If you are willing to risk collateral, or have a lot of collateral to put up for a loan, a secured loan might not be a bad option.
This is especially true if you’re dealing with a bank, need a very large loan, and have an excellent credit score. For everyone else, unsecured small business loans are often more appealing and a better choice.
Unsecured Small Business Loans from BizFly Funding
You can apply online, get approved quickly, and get funded in as little as 1 business day. The customer service is outstanding, too. BizFly Funding is a leader in alternative lending, focusing solely on the small business funding market in the US.
Unsecured small business loans are just one of the products they offer, alongside lines of credit, merchant cash advance loans, debt consolidation loans, short-term loans, and more.
Frequently Asked Questions about Unsecured Business Loans
Unsecured business loans don’t present the same kind of risk for business owners and borrowers in general as their secured counterparts do.
That’s not to say, however, that defaulting on the loan is okay, or that you don’t need to pay it back. When you default on a secured loan, you forfeit your collateral to repay the principal and interest.
With unsecured business loans, there is no collateral to forfeit. However, the lender can turn your account over to a collections agency, which can lead to a legal proceeding in many jurisdictions.
Ultimately, the lender will get their money back, either as part of a legal proceeding, bankruptcy proceeding, or other legal action against your business.
You’re just not on the hook for more value than the principal and interest that you owe when you take out an unsecured business loan.
The same is not true of a secured loan, where collateral can be valued at several times the principal and interest of the loan.
Small business loans can be either secured or unsecured. Often, many lenders offer one or the other, though some offer both.
Secured business loans typically are more common among banks and traditional financial institutions, whereas unsecured business loans are more typical of alternative, non-bank lenders.
Depending on the lender and your business, you may qualify for an unsecured small business loan, secured small business loan, both, or neither.
In most cases, when you choose a private, non-bank lender like BizFly Funding, you can obtain an unsecured business loan fairly easily.
First, you’ll need to make sure that you meet the minimum unsecured business loan requirements to qualify for the loan.
These typically include a minimum credit score requirement, time in business requirement, and monthly revenue requirement.
Next, you need to fill out the application. BizFly Funding offers a streamlined online application process that is fast and easy to use.
Then, the lender will review your application and be in touch, either to discuss your options, follow-up with a question, or to tell you you’ve been approved.
BizFly Funding offers unsecured business loans that can get you the money you need for your business in as little as 1 business day.
Unsecured small business loans for bad credit customers are available, especially from alternative, non-bank lenders.
Banks are very risk-averse, and tend to require collateral (secured loans) for customers with poor credit scores or limited credit history.
By contrast, alternative lenders, like BizFly Funding, offer unsecured small business loans with low minimum credit score requirements (at BizFly Funding, the minimum credit score is only 500 for unsecured small business loans).
This means that even those customers with poor credit can qualify for unsecured small business loans, and get the money they need without risking precious collateral.
As with all loans and credit products, the unsecured business loan rates will vary based on a number of criteria. The health of your business and your finances are of primary consideration.
Longer time in business, a higher credit score, and greater monthly revenue than the bare minimum unsecured business loan requirements will usually mean you can qualify for rates on the better end of the spectrum.
The size of the loan you are requesting, and the term or duration of that loan (how long it takes to repay it) also play a role in determining the overall unsecured business loan rates that you may be eligible for at a given lender.