It takes time for new businesses to break even. Once they’ve started generating a profit, revenues still tend to fluctuate, making it challenging to keep up with fixed costs.
According to the Small Business Credit Survey, 54% of businesses report uneven cash flow and paying operating expenses as primary financial challenges.
There may be times that you need to find outside funding to cover expenses like rent, utilities, and payroll until revenue picks up again. Unsecured business loans are one way to bring cash into the business without leveraging assets like your property or equipment.
What are unsecured business loans?
You can take out unsecured business loans for your company without putting down any collateral. Collateral refers to valuable items, such as equipment or inventory, that you can use to secure a loan.
If you put down collateral and fail to repay your loan, your lender can take possession of the collateral, which adds risk to the borrower (i.e., you).
However, since unsecured loans are more risky to the lender, they often come at higher costs.
Unsecured business loans: Application process
The overall process of obtaining an unsecured business loan is similar to that of any other type of loan.
First, you submit an application for the lender to review. Since you’re not offering collateral, the lender will consider your business’s financial performance and creditworthiness. If approved, you’ll receive the money and then pay it back plus interest over time.
That said, there’s a bit of variation in how you receive the money and pay it back, which depends on the type of unsecured loan you choose.
Unsecured lending options for entrepreneurs
Here are the most common types of unsecured business loans:
- Business line of credit: Similar to a business credit card, you have access to a preapproved amount of money, and you can withdraw it as needed. You only need to pay back the funds you take out, plus interest. Payments are made in cash installments.
- Invoice factoring: You finance against unpaid invoices. The lender gives you a percentage of the invoice upfront (usually 80%-90% of the value) and then collects the total payment from the customer.
Once the lender receives the customer’s payment, you get the remaining money minus fees. Steven Kibbel, certified financial planner at Kibbel Financial Planning, describes this method as “beneficial for businesses with long invoice cycles or those looking to improve cash flow.” - Merchant cash advance (MCA): You receive a lump sum of cash upfront from your lender and repay it by automatically giving your lender a percentage of your future debit and credit card sales. This business financing option uses a factor rate instead of interest. For instance, if you have a factor rate of 1.5, you’ll pay 150% of what you borrowed. Typical factor rates fall between 1.2 and 1.5.
- Peer-to-peer (P2P) lending: Also known as social or crowd lending, P2P connects entrepreneurs directly to investors who are willing to loan money. The terms and requirements vary, as they are set by investors.
- Term loan: You receive the money in a lump sum from your lender and pay it back plus interest in cash installments following a defined payment schedule.
Advantages and disadvantages of unsecured business loans
For many business owners, unsecured loans are an excellent resource that helps to maintain operations during lean times. That said, it’s important to understand the pros and cons of unsecured loans to see if they’re the right type of financing for your business.
Advantages of unsecured business loans
- These loans can support business growth. One survey by American Express found that 41% of small businesses regularly turn down opportunities because they’re concerned about future cash flow issues.
- There’s less risk for you. The lender can’t seize your assets if you don’t make repayments.
- These loans are accessible, and you can even find reputable lenders that offer unsecured business loans for bad credit.
- The application and approval process is often faster than with secured business loans because lenders don’t have to assess the value of your collateral. Some lenders will even approve you a loan the same day.
Disadvantages of unsecured business loans
- Some lenders may require a personal guarantee. This means they can seize your personal assets, such as your car or home, if you’re unable to pay back the business loan. Personal guarantees differ from collateral in that they aren’t tied to a specific asset.
- Unsecured loan options tend to be more expensive than their secured counterparts. Since your lender takes on more risk by offering this type of loan, it may have higher interest rates and fees.
- You may have to meet stricter eligibility requirements for an unsecured loan, such as higher credit score or revenue minimums or longer time in business.
- In general, unsecured lending options have lower loan amounts. Since you’re not putting down collateral, your lender may not be willing to provide you with as much money.
Best unsecured business loans
Now that you’re familiar with the types of unsecured business loans, here are some of the best loan products from reputable traditional and online lenders.
Bluevine
Bluevine is a fintech company that offers business checking accounts and unsecured business lines of credit up to $250k. The online application is fast and easy, so you can get a decision within minutes. You can choose between weekly and monthly payments that are automatically withdrawn.
Requirements:
- Corporation or LLC in operation for at least 24 months.
- No bankruptcies in the past three years.
- Minimum revenue of $40k monthly or $480k annually.
- Personal FICO credit score of 625 or higher.
What we like: Great for flexible financing needs and a quick application process.
American Express
The American Express Business Line of Credit is a good funding option if you prefer to work with a well-established, traditional banking institution. It offers quick applications, transparent terms, and flexible loan durations ranging from six to 18 months.
It has higher credit score requirements than Bluevine but is less strict on the minimum monthly revenue and age of the business.
Requirements:
- Must be in operation for at least 12 months.
- Borrower must be at least 18 years old and have a valid business bank account.
- Minimum monthly revenue of $3k.
- Minimum personal FICO credit score of 660.
What we like: Well-established lender with lower revenue requirements.
OnDeck
OnDeck offers unsecured small-business loans ranging from $5k to $250k. If you’re approved, you’ll receive your funds the same day. You can opt for repayment plans that are as long as 24 months.
Another benefit of OnDeck is that it doesn’t do a hard credit pull when processing your loan application, so you don’t have to worry about it affecting your credit score.
Requirements:
- Minimum of one year in business with a valid business checking account.
- Annual revenue of $100k or more.
- Personal FICO credit score of 625 or higher.
What we like: Quick access to funds with predictable repayment terms.
Biz2Credit
Biz2Credit offers financing created specifically for entrepreneurs and small-business owners, including working capital loans ranging from $25k to over $2m. Repayments can be made daily, weekly, or biweekly.
Your repayment amounts are variable and determined by your cash flow, making this a good choice for businesses that don’t want to commit to a fixed repayment plan.
Requirements:
- Minimum of six months in business.
- Annual revenue of over $250k.
- Personal credit score of 575 or higher.
What we like: Higher loan limits and variable repayment amounts.
LendingClub
LendingClub is a peer-to-peer lending platform that offers business term loans through a partnership with the nonprofit Accion Opportunity Fund. Through LendingClub, you can apply for loans ranging from $5k to $500k with a fixed monthly repayment schedule that can vary between one and five years.
Requirements vary based on the lender that you choose, but by getting rid of the bank, LendingClub can offer more competitive interest rates.
What we like: Competitive interest rates and personalized coaching and mentoring through Accion Opportunity Fund.
Credibly
Credibly offers a variety of small-business funding products, including an MCA offer with a max of $400k. You can complete the online application in minutes and receive your decision in a few hours. With Credibly, factor rates start at 1.11, which is lower than the average.
Requirements:
- At least six months in business.
- Minimum of $15k in average monthly bank deposits.
- Minimum credit score of 500.
What we like: Flexible and affordable repayment options.
FundThrough
FundThrough is a tech-enabled invoice-factoring company that serves B2B businesses with at least $100k in outstanding invoices. It provides fast funding and makes the process easy by giving you the option to sync to your accounting software and select which invoices you want to fund.
Requirements (based on invoices):
- Invoice amounts of $100k or higher.
- Invoices to other businesses or government.
- Invoices for completed services.
- No real estate or construction.
What we like: Easy-to-use platform that syncs with your accounting software.
As you can see, eligibility requirements and loan amounts vary by lender. While these are all reputable providers, comparing the offer terms can be helpful.
André Disselkamp, co-founder of the insurance company Insurancy, advises entrepreneurs to do their due diligence to “ensure you’re getting competitive rates while reading the fine print for any hidden fees.”
This will help you calculate the total cost of the loan and find the most affordable financing option based on your business’s needs, whether that’s covering short-term operating costs, purchasing inventory, or growing your team.
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