One of the most common forms of small business funding comes in the form of small business loans. Specifically, the most common type of small business loan is what is known as an unsecured small business loan.
Below, we’ll look at the pros and cons of this kind of small business funding option.
However, it’s important to first understand the difference between a secured and unsecured business loan, what those terms mean, and what those differences translate into in terms of benefits or drawbacks about the loan itself
Understanding Unsecured Business Loans vs. Secured Business Loans
Simply put, the terms secured or unsecured as they relate to loans have to do with the guarantee on repayment of the loan. Specifically, a secured loan is one that is backed by collateral.
Typically, this is property or assets like a home, office, vehicle, or equipment that is put up as a guarantee of repayment. If the borrower defaults, the lender can recoup the value of the outstanding small business loan and interest payment via seizure and sale of the collateral.
An unsecured business loan does not have any collateral requirements. As such, it’s the preferred style of small business loan for many small businesses across multiple market sectors.
Of course, the benefits for small business owners of this type of small business loan also come with some drawbacks, as we’ll explore below.
The Pros of Unsecured Small Business Loans
There are several clear advantages to unsecured small business loans over their secured counterparts.
Namely:
- No collateral requirements for an unsecured business loan mean the risk to the business owners is limited.
Your personal property or business property can’t be seized to pay off the loan. Since around half of all small businesses fail within the first 5 years, there’s a statistically good chance that you may default on the loan, or that you may have to declare bankruptcy.
In those cases, not losing your home, car, or other personal assets to satisfy business debts can be a huge advantage.
- Unsecured business funding allows you to get money quickly, which can be critical to maximizing your capital’s efficacy for business growth and operations.
Without collateral, there is a lot less paperwork and a less time-intensive application process with most unsecured business lenders. There is no need for appraisals or similar time-consuming tasks.
And since time is money, and many small businesses run extremely tight on their cash flow and income, unsecured business loans can be a timely solution.
- With an unsecured small business loan, your credit score is less of a factor in most cases.
So long as you meet minimum monthly revenue requirements, and fairly basic time-in-business requirements, your credit score is less of a factor in obtaining small business funding.
The terms associated with business loans without collateral will naturally vary from lender to lender, but as a general rule, this principle holds true across the board.
The Cons of Unsecured Small Business Loans
Naturally, there are also disadvantages to choosing unsecured business funding over a secured, collateral-based lending product.
Some of the key disadvantages include:
- Higher borrowing costs. Since the unsecured small business loan presents a greater risk for the lender, the interest rates charged tend to be higher than those present on collateralized business loans. This is the key trade-off that the borrower must reconcile.
You shed the risk of losing personal assets, and the bank or unsecured business lender shoulders a greater burden of risk on recouping their money, which means higher rates, and a higher cost of borrowing the money you need.
- Most unsecured small business loans come with shorter terms than their secured counterparts.
This means larger monthly or weekly repayment amounts are required. Coupled with the higher interest rate discussed above, this can mean substantial cash flow management problems for some businesses.
- Unsecured business loans generally have a lower overall maximum funds availability compared to secured loans.
Since the risk is higher, and there is no guarantee on repayment the way there is with a secured loan, most unsecured business lenders cap their available funds at several times less than their secured options.
- From an accounting standpoint, unsecured small business loans don’t offer a tax advantage, as the interest is not tax deductible.
Most collateralized loans have tax-deductible interest. Of course, if your business is not profitable or not paying taxes, or taxes are not a major consideration, then this disadvantage of unsecured small business loans probably won’t factor much in your borrowing decision.
Where to Find Unsecured Small Business Loans
If your small business is in need of unsecured small business funding, particularly small business loans, one of the best sources in the US is BizFly Funding.
BizFly Funding offers a full range of small business funding products. They are a non-bank alternative lender, and offer unsecured business lending services including loans, lines of credit, merchant cash advances, and much more.
The requirements to qualify are extremely minimal, so that most businesses can indeed take advantage of one or more forms of unsecured small business funding from BizFly Funding.
Additionally, the application process for the unsecured business loan and other unsecured business funding services at BizFly Funding is fast and online. Their customer service team is exceptional, and will be in touch within hours in most cases.
What’s more, you can have your funds in as little as 1 business day following approval. For small businesses that are in need of quick, affordable small business funding, BizFly Funding can be the ideal lending partner you need to take your business to the next level.
They can help to ensure you end up in the “good” half of the 50/50 split on businesses that fail or succeed.
