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Best Unsecured Business Loans in May 2024

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What is an unsecured business loan?

An unsecured business loan is a type of loan that does not require you to post physical collateral, such as business equipment, inventory, or real estate, to secure funding. However, even if physical collateral is not required, it does not necessarily mean that you will be discharged if you are unable to repay your unsecured loan. Most loans are backed by personal guarantees or Uniform Commercial Code liens.
A personal guarantee makes you personally liable for the debt if the company becomes insolvent, and in the event of default, the lender can seize your personal assets to recoup your losses. A UCC lien gives lenders the right to seize your business assets if you can't repay your loan. Typically, the lender will file a lien on her UCC with the Secretary of State's office after you sign the loan agreement.

A lender may file a lien against specific assets or a blanket lien that allows it to seize business assets needed to recover losses.

How do unsecured business loans work?

Unsecured business loans typically work like other types of debt financing. You apply for a loan, receive the funds, and then repay the borrowed amount with interest over time.
Unsecured business loans can usually get you funding faster than secured business loans because the lender doesn't have to verify the value of your collateral. However, the lack of collateral also increases the risk for lenders. Therefore, unsecured loans usually have higher interest rates and require a personal guarantee.

Types of unsecured business loans

There are different types of unsecured business loans, including:

business term loan

When most people hear the word business loan, they probably think of term loans. These loans are a lump sum of capital borrowed from a lender and repaid over a period of time. If you need to make certain investments or purchases for your business, term loans can be a good option.

business credit line

A line of credit is a flexible form of financing that allows you to borrow up to a certain limit and pay only interest on the amount borrowed. Then repay the funds and continue drawing the line. Unsecured business lines of credit can be used for working capital and other short-term expenses. These products are also used as emergency funds.

invoice factoring

Invoice factoring allows you to sell your unpaid invoices for cash. Factoring companies are responsible for managing invoices and collecting payments from customers. The factoring company may want established billing practices and a set period of operation, but since you are selling the assets directly to the factoring company, you may not need to provide a personal guarantee.

Seller cash advance

With an MCA, a merchant cash advance company advances you cash based on your sales, and you pay the company back with a portion of your future sales. This type of loan is usually easier to qualify for than other business loans. However, merchant cash advances are risky and expensive and should be treated as a last resort.

Advantages and disadvantages of unsecured business loans

Strong Points

No physical collateral is required. You can get a loan even if your business doesn't have many physical assets.

Start-up businesses and borrowers with bad credit may be eligible.

Cons

APRs are typically higher than secured business loans.

A personal guarantee or UCC lien may be required.

Less desirable conditions (e.g. lower loan amount, shorter repayment period).

Sometimes it can be difficult to access the best options. Typically, you will need strong financial standing and creditworthiness to qualify for the most competitive unsecured loans offered by banks.

Where can I get an unsecured business loan?

Unsecured business loans may be available from both traditional financial institutions, such as banks and credit unions, and online lenders.

Bank loans generally offer the most competitive interest rates. However, to qualify for an unsecured loan from a bank, you will likely need multiple years of business history, strong personal credit, and a good annual income.

By comparison, online lenders have more flexible eligibility and may be able to get you funding faster than traditional lenders. However, like banks and credit unions, online lenders may also require personal guarantees for unsecured business loans.

How to get an unsecured business loan

Follow these four steps to get an unsecured business loan.

1. Determine your financial needs

You need to consider how much money you need and how much debt you can afford. Business loan calculators can help you estimate payments and interest.

2. Evaluate business qualifications

If you don't secure your loan with collateral, lenders will place more emphasis on traditional business loan requirements, such as your personal credit score, annual revenue, and business hours.

Online lenders often accept start-up businesses and borrowers with bad credit, but these businesses may receive higher interest rates. Existing businesses with good credit and strong finances will have access to the most desirable interest rates and terms.

3. Compare lenders

You should research different lenders to find the best option for your business. When comparing your options, you should consider factors such as loan limits, interest rates, repayment terms, and fees. You should also consider the lender's application process, time to funding, customer service, and reputation.

🤓 Otaku Tips

Beware of predatory lenders who impose unfair or deceptive loan terms on borrowers and especially target high-risk borrowers. To avoid such lenders and scams, always look for transparent terms and interest rates, compare fees with reputable lenders, and make sure that the lender reports to one of the three major credit bureaus. Please check if it is.

4. Submit your application

Application requirements vary by financial institution, but typically you will need to provide the following:

  • Basic information about you and your business.

  • Corporate and personal tax returns.

  • Business and personal bank statements.

  • Financial statements.

Online lenders often speed up the underwriting process by allowing you to connect your financial account directly to their platform. You may be able to get a business loan from an online lender in as little as 24 hours. Banks and credit unions, on the other hand, can take days or even weeks.

Alternatives to unsecured business loans

If you don't think an unsecured business loan is a good option for your business, you may want to consider the following alternatives.

  • SBA loan. SBA loans are partially guaranteed by the U.S. Small Business Administration and are issued by banks and credit unions. These loans have longer repayment terms and lower interest rates. All SBA loans require a personal guarantee, but SBA 7(a) loans under $50,000 may not require you to provide physical collateral. However, you may need good credit and strong financial strength to qualify.
  • Business credit card. If your business is too short to qualify for an online business loan, startup business credit cards are usually available to businesses of all ages. Business credit cards provide flexible, unsecured financing that can be used for everyday expenses as well as big-ticket purchases, depending on your credit limit. However, you may be required to provide a personal guarantee.
  • Small business subsidies. If you don't want to go into debt or don't yet qualify for affordable financing, small business grants can be a good option. It can take time to find and apply for the right grant for your business, but once you secure a grant, you have access to free funds that you don't have to pay back.
  • Crowdfunding. Crowdfunding is also worth considering if your business doesn't quite meet the traditional financing requirements. You can create a business profile on crowdfunding platforms like Kickstarter, publish your funding goals, and raise money from the public. They typically offer some type of compensation or equity in exchange for funds. Crowdfunding is an especially good option for product-based businesses with an internet following.

find the right business loan

The best business loans are generally those with the lowest interest rates and the most ideal terms. However, other factors, such as time to funding and business qualifications, will help determine which option you choose. NerdWallet encourages you to compare small business loans to find the best fit for your business.

FAQ

methodology

NerdWallet's review process evaluates and rates small business loan products from traditional banks and online lenders. We collect over 30 data points for each financial institution using the company's website and public documents. We also review the lender's initial application flow and may contact company representatives. NerdWallet's writers and editors conduct thorough fact checks and update them annually, but also throughout the year as needed.

Our star rating recognizes small business-friendly features such as interest rate and terms transparency, flexible payment options, fast financing times, accessible customer service, payment reporting to business credit bureaus, and responsible lending practices. Give points to the financial institution that provides it. We weigh these factors based on our assessment of which are most important to small business owners and how significantly they impact the borrower experience.



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