Too often, small businesses that fail don’t fail because of a lack of innovation, good products, or good services, but a lack of funding for their operations.
While there are many different kinds of small business funding product available, a simple small business loan remains one of the most popular choices. When it comes to small business loans, however, they are not all created equal.
The most common distinction in types of small business loans comes down to whether the loan is a secured business loan or unsecured business loan.
Don’t worry if you’re not familiar with exactly what those terms mean. Business owners have a lot on their plate to juggle, and the intricacies of the finance world are not always high on that list.
Nevertheless, understanding the difference between secured and unsecured small business loans, their respective pros and cons, and how they can be beneficial for your business is important.
After all, as with any business decision, you need all the information and knowledge you can get in order to make an informed choice. So, what’s the best choice for your business: a secured business loan, unsecured business loan, or some other funding product entirely?
Let’s start answering that question by digging into what secured and unsecured business loans mean in the first place.
Secured vs. Unsecured – What Do Those Terms Mean?
Put simply, the terms secured and unsecured around a loan or financial product have to do with whether or not collateral is involved.
It’s a common misconception that it has something to do with the security or stability of the loan or lender, which is completely untrue. Rather, the “secured” and “unsecured” adjective describes the loan from the perspective of the lender and the debt.
A secured loan or debt is one that is backed by collateral – repayment is secured, as defaulting on the loan will result in collateral being seized for the lender to be made whole.
Unsecured loans do not require collateral, so the loan or debt is considered unsecured – if the borrower defaults, there is no guarantee that the lender will be made whole.
Of course, that doesn’t mean that unsecured business loans allow you to simply avoid repaying the loan and get away with it – it’s still a financial obligation like any other.
However, it does limit some of the liability for small business owners, especially during uncertain economic times and in rapidly-changing business environments.
As such, unsecured small business loans are often the preferred type of loan for small business owners (we’ll talk about the reasons why in more detail later in this guide).
Secured vs. Unsecured Business Loans – The Benefits and Tradeoffs
As with all products and services in the world, there are benefits and tradeoffs associated with the decision between a secured business loan and unsecured business loan.
One isn’t necessarily better than the other or worse than the other. However, there are some key benefits that make unsecured small business loans a more popular and accessible choice for small business customers.
Objectively speaking, here are some of the key considerations when looking at secured vs. unsecured business loans, and trying to decide which is right for your business needs:
Why Most Small Business Owners Choose Unsecured Business Loans
It’s this last point we addressed above that often drives the preference for unsecured business loans among many small business owners. Small businesses are risky ventures to begin with, and your odds of success are about even with your odds of failure.
Most people do not want to gamble $300,000 – $500,000 in property, plant, equipment, inventory, or other assets, just to take out a $100,000 loan.
If the worst happens, now you’re out $400,000 – $600,000 rather than just $100,000. It can create serious debt that can spill over into your personal finances and make it impossible to recover from the default.
It certainly is somewhat more costly, on average, to take out an unsecured small business loan, owing to the higher unsecured business loan interest rates. However, a $100,000, 5 year loan at 8% vs. 12% interest only amounts to a difference of less than $12,000 in interest over the life of the loan.
For an extra $12,000, you can avoid risking $300,000 – $500,000 at 50/50 or worse odds. For most small business owners, that math is a no-brainer in favor of an unsecured business loan.
The fact that unsecured small business loans are also easier to access is another compelling factor. Private lenders generally have unsecured business loan requirements that are more easily met for small businesses.
This means unsecured small business loans for bad credit customers, customers who haven’t been in business that long, or who have limited monthly revenue are far more realistic and possible than their secured counterparts.
The combination of more-easily-met requirements, minimally increased interest rates, and radically reducing borrower risk all add up to make unsecured business loans the preferred choice for most small business owners.
How to Get an Unsecured Business Loan from BizFly Funding
In the US, if you’re looking for unsecured small business loans or any other type of small business funding, you should consider applying at BizFly Funding.
BizFly Funding is a private lending firm that only offers small business financing services, with the expertise, knowledge, and experience to help you fund your small business operations.
They offer unsecured business loans, debt consolidation loans, lines of credit, merchant cash advances, and many other financing products.
The unsecured business loan requirements are easy to meet, and for most customers, unsecured business loan interest rates are highly competitive.
To find out more or start the online application, visit https://bizflyfunding.com.
Frequently Asked Questions about Unsecured Business Loans
With an unsecured small business loan, you’re liable for the outstanding balance and interest on the loan. If you cannot make repayment as scheduled, lenders may work with you with some accommodations.
If that is not successful, however, you will likely incur fees and penalties on the loan, and have your account turned over to a collections agent.
This will also have a negative impact on your credit and may result in judicial proceedings in some jurisdictions as well.
The key benefit of how unsecured business loans work, however, is that you will not lose any collateral, and will never have risked more than the value of the loan and interest.
Unsecured business loan interest rates vary from lender to lender, and often move with market trends and forces. More specifically, most lenders offer a range of interest rates.
The exact rate that you may qualify for as a borrower will typically depend on your credit score and history, monthly revenue, time in business, the size of the loan, other outstanding debts, and other details.
At BizFly Funding, the interest rates on unsecured business loans start as low as 9%.
Every lender has different unsecured business loan requirements. Most clearly post these minimum requirements in their store, branch office, or online.
Typically, a minimum credit score requirement, months or years in business requirement, monthly revenue requirement, and other basic requirements (business licenses, residency in the market served, and so on) are fairly common.
At BizFly Funding, you need a minimum 500 credit score, at least 6 months in business, and a minimum monthly revenue of at least $10,000 to qualify for an unsecured business loan.
Some lenders require a personal guarantee for unsecured business loans. These loans are somewhere in between a secured loan and an unsecured loan, if truth be told.
A personal guarantee is effectively a promise of repayment, which entitles the lender to seize assets or funds equal to the value of the outstanding loan balance and interest if repayment is not made as agreed.
It happens after-the-fact, with no guaranteed collateral valued and put up when the loan is made. Many private lenders offer unsecured business loans with no personal guarantee required.
Private lenders are your best source for unsecured small business loans with bad credit.
Many have much lower credit score requirements than banks and traditional lenders, who often only accept the top 20% of business applicants by credit score.
At BizFly Funding, customers with credit scores as low as 500 can still qualify for an unsecured small business loan.