Credit and loans provide small business owners with the funding they need, at an affordable price, to allow for the hiring of employees, growth of the business, purchase of supplies, raw materials, and equipment, and much more.
When it comes to small business funding, there are several different options available – different types of loans, lines of credit, and so on.
Across all of these types of small business funding, there is one major point of differentiation – whether or not a loan is secured or unsecured. This is an important concept in financing, and plays a significant role in the risk level for small business borrowers.
In this article, we’ll take a look at unsecured business loans in particular, discussing what they are and how they work, how they differ from secured business loans, and why they offer faster funding with less risk for small business owners.
Additionally, we’ll answer some frequently asked questions about unsecured small business loans and business funding in general.
Unsecured Business Loan Basics
Unsecured business loans and secured business loans differ on the grounds of whether or not they are backed by collateral. Secured loans or credit products require collateral, whereas unsecured loans and credit products do not.
The terms refer to whether or not the debt itself is “secured” for the lender – whether or not they are guaranteed a means of recouping their funds, even if the borrower’s business fails.
In pretty much all other respects, unsecured business loans and secured business loans work in a similar manner. They provide cash on a lump sum basis, which then must be repaid over a set period of time, with interest.
The amounts available, terms, eligibility requirements, repayment frequency, and other details will all vary based on the lender a small business owner may choose. Unsecured business loan interest rates are the other area in which these two loans may differ.
In general, secured business loans are less risky for lenders, since they have a guarantee of repayment. As a result, they tend to offer secured loan funds at lower interest rates than those offered for unsecured business loans.
As we’ll discuss later in this article, there is more to consider than simply the unsecured business loan interest rates, however, which often makes it more desirable for borrowers to go with an unsecured business loan over a secured one.
Why Unsecured Business Loans are Faster and Easier to Obtain
As a small business owner, time is often a critical factor contributing towards your business’ success.
Being able to jump on emerging business opportunities, respond to changes in how your products are services are being received, and adjust to changes in the market can make a big difference, especially in the early years of your operations.
This is another reason why many small business owners prefer unsecured small business loans – they are much faster and easier to obtain than their secured loan counterparts.
Unsecured business loans can be obtained quickly because they do not require collateral. The process of putting up collateral and evaluating its value can add days to weeks to the application and approval process with a secured loan.
By contrast, unsecured small business loans don’t require this step, and can therefore be approved and have funds delivered to a business in a matter of days, or even within 1 business day in many cases.
Likewise, because unsecured business loans don’t have complex collateral requirements, it’s fairly easy for small business owners to obtain them.
Most lenders who offer unsecured small business loans only have a few basic requirements – a particular minimum credit score threshold, a minimum time in business (often only a few months), and/or a minimum monthly or quarterly revenue requirement.
That’s it, and very easy for most small businesses to satisfy.
Unsecured Small Business Loans are Less Risk for Borrowers, and Often the Only Option Available, Too
For most small businesses, unsecured business loans present less risk than secured loans. While the unsecured business loan interest rates are slightly higher, and you will pay marginally more for an unsecured small business loan, there is no risk of collateral.
The way collateral works and is valued often means that secured loans will require collateral with a real value of 3 to 5 times the amount of the loan you are taking out. If you default on the loan, you forfeit all of that collateral.
For a simple $10,000 loan on a 3-year term, for example, a secured loan may offer an interest rate of 5%, whereas an unsecured business loan might have a rate of 10%.
But the unsecured business loan requires $0 risked in collateral, whereas a secured business loan might require collateral valued at $40,000.
Yes, you will pay slightly more over the life of the loan on the unsecured business loan ($1,616 vs. $790), but the tradeoff is there is no collateral risk. Most small business owners would rather pay the extra $826 in interest payments to protect their $40,000 in collateral assets.
The bottom line is that the average small business owner can quickly and easily access an unsecured small business loan, at a competitive and affordable interest rate, without risking collateral.
Even beyond the standpoint of risk, there’s an even simpler point to be made here – many small businesses simply don’t have the kind of collateral they might need in order to get a secured small business loan.
To be sure they have assets, but only certain types of assets qualify as collateral, with many lenders having fairly strict requirements and taking only highly liquid assets for their secured loans.
So, whether it’s a matter of limiting risk due to the uncertainties of the future, or simply a lack of suitable collateral, unsecured small business loans really are the preferred type of loan for the vast majority of small business owners today.
Unsecured Small Business Loans from BizFly Funding
Small businesses in need of funding should consider applying at BizFly Funding. BizFly Funding offers unsecured business loans, as well as several other unsecured loan and credit products, such as merchant cash advances, lines of credit, short-term loans, and more.
BizFly Funding works exclusively in small business funding, and provides outstanding service, easily-met qualification requirements, and fast funding, with many customers getting their funding within 1 business day.
To find out more, or to start the application process, visit BizFly Funding at https://bizflyfunding.com.
Frequently Asked Questions about Unsecured Business Loans
Absolutely! Unsecured small business loans do not require collateral from the borrower.
In some cases, they may require a blanket personal guarantee from the borrower, which has the force and effect of guaranteeing repayment or repayment priority if bankruptcy were to occur.
However, this is not always the case, and there are many lenders – particularly non-bank lenders – who do not require a personal guarantee.
As discussed above, some lenders offering unsecured business loans will require a personal guarantee from the borrower.
This has the effect of decreasing some of the risk on the lender, since it means there’s a greater obligation to repay the loan in a bankruptcy or other business debt restructuring proceeding, compared to debts that aren’t backed by a personal guarantee.
However, there are also many lenders with unsecured business loan requirements that do not include a personal guarantee.
There are many different types of loans and credit products available for small businesses today.
The best type will vary from business to business, based on the particular expenses or intended use for the funds you require.
Options such as short-term small business loans, secured or unsecured business loans, lines of credit, and several other types of loan and credit products can all be well-suited for a small business’ needs depending on the circumstances, qualification requirements, and related details.
Generally speaking, the best source for unsecured business loans is a private, non-bank lender. Banks tend to be very risk averse, and see small business lending in general as a risky venture.
As a result, they often impose significant requirements in order to obtain a loan (if they offer an unsecured business loan in the first place – many only offer secured versions).
By contrast, private non-bank lenders are much more open to risk, and focused not on depositor accounts like banks, but deal almost exclusively in small business financing.
As such, it’s usually easier and faster to get an unsecured business loan from one of these sources, as opposed to banks or traditional financial institutions.
Unsecured business loans are often the easiest to qualify for, at least in comparison to secured loans. However, they may not be the easiest loan or credit product for your particular business to access.
It often depends on what the requirements are at a given lender, and what products they offer. Various options may be easier to obtain depending on the particulars of your qualifications.
For example, unsecured small business loans for bad credit customers are available from many lenders, but still may be out of reach of those businesses with no credit history.
In these cases, something like a merchant cash advance might be easier to get approved for when you need quick cash.