Unsecured corporate loans are a type of financing that is not backed by assets or collateral. Collateral requirements mean that in case you default on your loan, the lender can seize your property to recover the unpaid amount.
This can be quite risky for you, as the business owner, and is why many entrepreneurs will opt for unsecured business loans. In this article, we will answer one important question: how does an unsecured business loan work?
Unsecured business loans don’t have collateral requirements. Which means you won’t need to pledge real estate, business equipment, investments, or other personal or business assets in order to secure financing.
In this way, unsecured business loans are less risky for you, the borrower. They can also be easier to access than secured financing options, especially if you’re a newer business that doesn’t own high-value assets.
With unsecured corporate loans, lenders won’t need to look into the value of the assets you own and you’ll be able to skip the appraisal phase entirely. Instead, your credit score, revenue, and potential for growth will have more weight throughout the application process.
Lenders will strongly base their approval decision on those factors.
The important thing to keep in mind about unsecured business loans is that they pass the additional risk over to the lender. Unsecured financing doesn’t give lenders the ability to automatically claim your assets in the event of a default. In short, it makes issuing loans riskier for them.
To compensate for this heightened risk, lenders will impose higher interest rates. Some lenders may be unwilling to approve unsecured business loans at all, and you may have a harder time obtaining this financing type at a bank.
Types of unsecured corporate loans
There are various types of unsecured corporate loans that you can choose from, including long-term loans, short-term loans, and merchant cash advance. Some types may work better than others depending on your situation and your needs for financing.
Take a look at how different types of unsecured corporate loans compare.
1. Long-term loans
Most long-term loans are secured and feature collateral requirements. This is because long-term loans are frequently used to finance major assets, such as real estate or equipment. In this scenario, the asset being financed would serve as the collateral underlying the loan.
Long-term loans are generally between 5 to 25 years. You can take out an unsecured long-term loan to finance an expansion or cover other business expenses. However, they can be fairly difficult to get approved for.
The risk for lenders is higher, you’ll likely end up paying more in interest on a long-term unsecured loan than you would on financing that comes with collateral.
If you’re planning on working with a bank, at the very least you’ll need to have a proven track record of business history, strong revenue, and good credit.
2. Short-term loans
Short-term business loans can be easier to obtain without collateral requirements. However, your financial criteria and credit score will still have a major influence on your application’s approval odds – especially if you’re working with a bank.
Short-term loans are typically issued with repayment periods of one year or less. They are best suited for short-term business expenses, like inventory purchases or operating costs.
Short-term loans can also help cover seasonal lulls while simultaneously allowing firms to prepare for upcoming busy periods.
3. Merchant cash advance
Merchant cash advances, also called merchant financing, provide businesses with an upfront lump sum of capital infusion that’s repaid as a percentage of future credit card sales.
Cash advances are technically not a loan – they’re actually an advance on your business’s future credit card sales.
Merchant cash advances are a type of unsecured corporate loans known for high approval rates and fast funding times. They can also be used to fund almost any type of business expense, but are generally best reserved for short-term needs.
When you apply for a merchant cash advance your business’s revenue will have the most weight – while your time in business and credit score will matter less. On the downside, merchant cash advances come with high-interest rates, which can cut into your daily sales.
Unsecured business loans vs. secured business loans
The main difference between unsecured business loans and secured business loans is the collateral, or the lack of it. Secured business loans have collateral requirements, meaning that you will have to provide an asset that the lender can take if you can’t repay your debt. Unsecured corporate loans don’t require a collateral, and lenders will typically compensate the risk with higher interest rates.
A good example of a secured loan is a mortgage. Mortgages are typically backed by the home’s value. If you stop making your payments your lender has the right to seize your home and sell it to recuperate your unpaid debt.
On the other hand, most credit cards are unsecured business loans. If you fall behind on your payments, the credit card company doesn’t have the right to automatically seize your home.
That doesn’t mean you won’t face serious consequences if you don’t repay your debt – it’s just that your most valuable assets won’t automatically be in jeopardy.
It’s important to keep in mind that many equipment loans and commercial real estate loans are secured. However, with these types of financing the collateral is typically the underlying asset that’s being financed, such as an office space or piece of machinery.
With these kinds of secured business loans, it’s unlikely you’ll need to forfeit personal assets in the event of a default.
What are the pros and cons of Unsecured Business Loans?
Some of the biggest pros of unsecured business loans include a shorter loan application process, less risk, and the fact that there is no collateral requirement. However, they also tend to have higher interest rates, the ratio of approval is lower, and the funding amounts are lower as well – which are the main cons of this type of loans.
Unsecured corporate loans are highly sought-after. They come with many benefits and unique advantages. However, it’s also important to be aware of the potential downsides of this type of financing. Take a look at some of the most noteworthy pros and cons of unsecured corporate loans.
Advantages of unsecured corporate loans
Shorter loan application process
Unsecured small business loans have significantly faster application processes and funding times than secured financing. This is because unsecured financing skips an entire step – the appraisal process.
Since you won’t be dealing with collateral, you won’t have to wait or pay, for the lender or an outside party to determine the value of the asset you’re using.
No collateral requirement
Collateral requirements can oftentimes be a roadblock for newer, smaller businesses. It can even impede their ability to get funding opportunities. Especially because many businesses simply don’t have high-value assets that can be used as collateral.
Unsecured loans can be a solution that works around these conditions.
Unsecured business loans transfer additional risks from the borrower to the lender. In case you’re unable to repay your debt, you won’t automatically have to forfeit the property you’ve used as collateral.
Unsecured business loans allow you to avoid a worst-case scenario by taking away the need for collateral in the first place.
Disadvantages of unsecured corporate loans
Higher interest rates
Unsecured business loans are typically more expensive than secured financing solutions. Because lenders are taking on extra risk, they’ll want to compensate themselves accordingly. This usually translates to higher interest rates for borrowers.
Lower approval rates
Because lenders view unsecured financing solutions as riskier, they’re likely to be more hesitant to approve them. If you’re working with a bank, you’ll face especially low approval odds and strict requirements for credit history and revenue levels.
Lower funding amounts
Because of the increased risks associated with unsecured business loans, lenders are also less willing to approve large funding amounts for this loan type. This means it’s unlikely you’ll be able to finance a large investment with an unsecured loan.
Where to find unsecured corporate loans
Wondering where to find unsecured business loans? The first step is to look into the different types of lenders you can work with.
Banks are typically the first lenders that come to mind when businesses need financing. However, most banks have collateral requirements – and even when they don’t you’ll still face lower approval odds.
Another option is to work with online lenders. Online lenders are more flexible and you’ll be more likely to find an unsecured business loan here. While online lenders can be slightly pricer than banks, you can still compare multiple offers to select the best deal. Fintech marketplaces like National allow you to accomplish exactly that.
National has a network of over 75 different lenders that offer small business loans personalized to your needs. Businesses are evaluated on more than just their credit history – instead, revenue levels and growth potential are taken into account.
Start by filling out the 60-second application and an advisor will reach out to you with personalized financing solutions.