Small business financing is key to helping you overcome challenges and take advantage of growth opportunities. By now, you’re probably familiar with different types of business loans, such as “secured” and “unsecured”. In this article, we will take a look at unsecured business loans without collateral, what they mean exactly, and how you can take advantage of them for your business.

The definition is as straightforward as it sounds – unsecured business loans are loans that aren’t backed by collateral. In other words, this means you won’t have to pledge your personal or business assets in exchange for financing. Instead, unsecured business loans are backed by your creditworthiness, rather than the assets you own.

Both your personal and business credit history can have a major impact on your ability to obtain an unsecured business loan. This is especially true if you’re applying for SBA financing or looking to work with a traditional lender, such as a bank.

Unsecured business loans without collateral can be harder to obtain if your finances aren’t in great condition or if your credit score is weak. Thankfully, there are some exceptions to his rule.

We’re breaking down everything you need to know about how unsecured business loans work and how to find financing according to your own criteria.

1. How do unsecured business loans without collateral work?

Unsecured business loans without collateral work by providing funding to businesses without the need to secure repayment with a personal or a corporate asset, such as inventory, equipment, or real estate. However, they are harder to obtain than secured business loans (which require a collateral), and interest rates may be higher.

Lenders want to minimize their risks as much as possible. One way to do this is by insisting on collateral requirements – or secured loans. These types of loans give lenders the right to seize your assets and recuperate their losses in case of a default.

While they are less risky for lenders, secured business loans ultimately pass the risks over to borrowers.

One way business owners can avoid losing their assets is by opting for an unsecured business loan. Unsecured business loans protect your assets by preventing lenders from automatically going after your property in case your business can’t repay its debts.

Unsecured loans are greatly sought after by business owners but they can also be difficult to get approved for. Plus, lenders are more likely to charge higher interest rates on unsecured business loans.

With unsecured business loans, you’ll be able to skip the appraisal phase entirely.  In a way, unsecured business loans are backed by your factors like your credit score, revenue, and potential for growth – rather than collateral. Indeed, these factors will hold the most weight throughout the application process.

2. What is the difference between a secured and an unsecured business loan?

The main difference is that secured business loans have collateral requirements while unsecured business loans do not. Mortgages are the most common example of a secured business loan. Home loans are essentially backed by the home’s value. In case you stop making your payments, lenders can seize and sell your home to recuperate their losses. 

On the other hand, most credit cards are a good example of unsecured loans. Although you’ll still face serious consequences if you don’t repay your debt – your most valuable assets won’t automatically be in jeopardy.

Instead, lenders will put heavy weight on your credit score and revenue or income levels when deciding whether to approve your application.

One factor to keep in mind is that many equipment loans and commercial real estate loans function as secured loans. The difference is that with these types of financing, the collateral backing the loan is typically the underlying asset being financed.

This can be an office space or a piece of machinery. In this scenario, it’s unlikely you’ll need to forfeit personal assets in the event of a default.

3. What are the different types of unsecured business loans without collateral?

Take a look at some of the most common types of unsecured business loans without collateral to decide which funding solutions would work best for your needs.

3.1. Term loans

Term loans feature a lump-sum payment repaid over regular installments for a predetermined period of time. These loans can be used to fund a large variety of business expenses and projects.

However, most banks and traditional lenders will require either collateral or a personal guarantee in exchange for a term loan. You’ll have an easier time acquiring unsecured term loans if you work with an online lender.

Even then, most are typically for short-term use, with repayment periods of one year or less.

3.2. Credit cards

Business credit cards or even personal credit cards can help cover a number of different expenses. And if you have good credit, you may even be able to unlock exclusive benefits, such as a temporary promotional 0% APR period.

The downside to using credit cards for business expenses is that they typically feature smaller funding amounts, which may make them inadequate for certain types of projects. Plus, credit cards are notorious for high-interest rates.

3.3. Merchant cash advances

Third on our list of unsecured business loans without collateral are merchant cash advances.

Merchant cash advances work distinctively from most business loans. Instead of making payments over regular installments, you’ll repay your debt via a percentage of your business’s daily sales.

In this way, you won’t have to worry about keeping track of payments. Merchant cash advances function more as an advance rather than a traditional business loan.

This financing type features high approval rates and fast funding times. They are short-term funding solutions and are best for financing immediate needs. When you’re applying for a merchant cash advance, lenders will heavily consider your revenue. While your credit score and time in business may matter less.

4. Can I get an unsecured business loan with poor credit?

Getting an unsecured business loan with poor credit may be difficult, but it’s still possible. A lot will come down to your other financial credentials and the type of lender you work with.

In most cases, you should prepare to be asked to provide the following:

  • Both personal and business credit history
  • Business financials including bank statements, tax returns, balance sheets, etc.
  • Detailed business plan including industry risk analysis and growth potential
  • Legal documents, including business licenses and registrations
  • Financial history, including bankruptcy or liens

In some cases, strong revenue and promising growth potential can help compensate for poor credit. But this can vary largely depending on whether you’re applying at a traditional lender like a bank or with an online lender.

Banks are known for having the strictest requirements. They typically want to see at least 2 years of business history, and may be unwilling to work with newer businesses.

Banks view unsecured loans as inherently riskier, which is why they are more hesitant to issue them – especially if your credit score isn’t great. Even if your bank application is rejected, you still have other options.

One solution is to work with online lenders. Online lenders are more flexible and willing to work with newer businesses and those with less than perfect credit. Plus, online lenders offer faster application processes with funding times as quick as 24 hours.

And if you’re worried about receiving higher interest rates from online lenders, you can compare multiple offers for unsecured business loans without collateral to find the best deal.

Do you want to learn more about unsecured business loans without collateral? Check this article.

5. Compare offers for unsecured business loans

Working with an online fintech marketplace like National, allows you to compare multiple personalized offers based on your credit score and financial criteria. National has a network of over 75 different lenders that offer small business loans and many unsecured financing options.

You can review offers for term loans, lines of credit, SBA loans, merchant cash advances, and more. Learn more about the business financing products you could qualify for. Start by filling out the 60-second application and you’ll be put in touch with a personalized advisor who will explain your options.

Get started here.