But it’s also extremely hard to come by for many small businesses, especially in the early stages of their existence.
Unsecured small business loans can often be a perfect solution to help new businesses thrive. With limited revenue and business history, it can be difficult to qualify for a traditional small business loan.
It also may be risky. That’s why more and more small business leaders are turning to unsecured business loans from alternative, non-bank lenders, to give them the seed money they need to turn their business into a success.
Learn more about unsecured business loans and other collateral-free small business funding options below.
Unsecured Business Loans vs. Secured Business Loans
First, it’s necessary to address what an unsecured business loan actually is, and how it compares to a secured business loan. Put simply, a secured business loan is one that is backed by some kind of collateral, whereas an unsecured business loan is not.
This is true of not just unsecured business loans, but any kind of unsecured business funding. Collateral typically means an asset or something of value, that a borrower puts up as a guarantee to the lender against repayment of the loan.
It can also include a general lien on business income rather than specific assets. Secured business loans and small business funding options require collateral to back, or secure, the loan.
This reduces the risk for the lender, since if the borrower defaults and cannot repay the loan, they have the right to seize and sell-off the collateral assets to get their money back.
At the same time, secured loans dramatically increase the risk for the borrower. Because collateral is usually not booked at fair market value, you can ultimately be on the hook for far more than what your loan is worth.
For example, if you take out a $25,000 small business loan that is secured, you may be required to put up a piece of equipment worth $50,000-$100,000 as collateral for that loan. If you default, you lose that piece of equipment, valued at 2 to 4 times the value of the loan.
Naturally, many small business owners want to avoid this kind of outcome, especially with the uncertainties of how their business will fare. So, many prefer unsecured small business loans to their secured counterparts.
The Tradeoffs with Unsecured Small Business Loans
Of course, there is a tradeoff between secured and unsecured small business loans. Because the risk is lower for the lender in a secured small business loan, they typically are able to offer lower interest rates on the loan.
This can mean a significant savings in the cost of borrowing, though at the risk of losing valuable assets if the loan defaults.
By contrast, unsecured small business loans tend to have somewhat higher interest rates, but present a lower risk for the borrower.
The higher interest rates are designed to compensate the unsecured business lending firm, since they are taking a much larger risk in providing a loan to a small business with no guarantee of repayment.
Choosing the right kind of small business funding option for your small business is obviously a balancing act – managing risk and reward, forecasting and guessing about the future, and doing what you think is right for your business.
While higher interest rates mean you pay slightly more in interest on the loan, most small business owners agree it’s worth it to avoid having to forfeit significant assets if the business fails and the loan defaults.
This is especially true when the only assets many new small business owners have are personal ones, such as their own vehicle, home, and so on. It may not be worth it to risk these assets for the business. With an unsecured business loan, you don’t have to.
Small Business Funding Options
Small business loans are not the only kind of small business funding that can be found in both secured and unsecured varieties. Other types of small business funding can also be either secured or unsecured, with similar tradeoffs in each case as those described above.
Business lines of credit are often a prime example, with unsecured business lines of credit being an extremely popular small business funding option.
These lines work similarly to a loan, but don’t provide you the full amount up front. Rather, you can draw against it, in whatever amount you need, up to the credit limit. You pay interest based on the outstanding balance, and can continue to borrow against the line up to the limit.
As you repay the outstanding balance, it becomes part of the unused credit limit total again, for you to borrow against over and over on a revolving basis.
There’s also the case of merchant cash advances, which are technically unsecured, but a bit different than the other options we’ve discussed. A merchant cash advance provides an up-front lump sum of money, with an interest rate of sorts (called a factor rate), that is repaid over time.
The exact time period isn’t fixed. Rather, the repayment comes from automatic deductions from a small business’ future credit or debit card sales transactions.
This is ideal for sales-based small businesses, because the repayment amount is dependent upon the rate of sales – when sales slow, repayment slows, and vice versa. This can really help with cash flow management, which is critical for small business success.
Where to Find Business Loans Without Collateral Requirements
BizFly Funding is one of the premiere unsecured business lending firms in the US. They focus exclusively on providing small business funding. They offer a number of different small business funding options, including all of the ones we’ve discussed here.
What’s more, you can apply online, get approved within hours, and get your funds often within as little as 1 business day.