First and foremost, we have to define, what are unsecured business loans? By general definition, they are a type of loan that are issued and supported only by the borrower’s creditworthiness and not by a type a type of collateral.
On the other hand, we have an unsecured loan that is obtained without the use of a property as collateral for the loan. To get an unsecured loan, borrowers must have a very high credit rating in order to be approved for an unsecured loan, and in this case, the business must have a high credit rating in order to be approved for an unsecured business loan.
Since an unsecured loan is not guaranteed by any type of property, these type of loans represent a much bigger risk for the lenders and as such, they usually have a bit higher interest rates than secured loans. An example of a secured loan is a mortgage.
If you are considering getting an unsecured loan, they might be good for you if you do not have enough equity in your home to be approved for an equity loan. The same can be said if you have a business and unsecured business loans. You should consider using an unsecured business loan if you do not have enough equity in your business. Simple as that.
Tell me about unsecured business loans
First of all, the keyword here is “business”. When an individual decides to start a small business instead of working for someone else he/she is making a step forward, a tough step. Entering any business for yourself is taking a certain amount of risk. Some people are founding their own businesses without any prior experience or even constant cash flow.
Unfortunately, it takes a lot of time for a business to generate constant revenue. And at the end, there is no guarantee that there will be any profits even if you make a name for yourself. So, if you are starting a business, you should a thing or two about unsecured business loans.
First of all, secured vs. unsecured business loans
We already said that secured loans are secured or “pledged” against some assets on the borrower, most likely a property which can be sold in order to cover the cost of the loan.
On the other hand, an unsecured business loan is a monetary loan that is not secured against any assets, may it be tangible or not.
Unsecured business loans come in different financial categories or packages from a lending company or a bank, some of them are:
- Credit cards
- Corporate bonds
- Payday loans
- Personal loans
Interest rate and unsecured business loans
When we are talking about the interest rate, you have to know that the applied interest rate depends on the lender, as well as the credit history of the borrower.
If you would compare a secured business loan and an unsecured business loan, the interest rate in an unsecured business loans are slightly higher and this is
because of the type an unsecured loan is. It is unsecured, there are no assets to “secure” it. Since a creditor is not protected, in this case, he/she will demand a higher interest rate in order to profit of the loan. It’s all about the amount of risk/amount of reward correlation for the creditor.
Are unsecured business loans worth it?
First of all, why would the creditor even loan you any money if you can’t guarantee that you will return it? That is totally up to you, you have to work for that loan.
Here are some basic tips when it come to applying for a loan.
- Make sure you have a good business credit report. Even more so, if you are organized and convinced about your promoting your business, your chances for obtaining a loan increase.
- Every lender, and I mean EVERY lender will look at your past credit reports (paying bills on time is important) for a reference.
- In order to get the best possible option for a loan, try to apply for more than loan, even better if you do it at different lenders.
- Fine print. I can’t stress this enough, read it carefully. For example, some long-term loans even add extra fees if the loan is paid off earlier.
Some reputable unsecured business loans
A note: I am not affiliated with any of these companies, this is my objective opinion on them and I do not get any sort of revenue when mentioning them.
- Fundbox – if you are a business that invoices its customers and you need a loan as fast as possible, you can take a look at this company. You have to be in business for at least 6 months and issue invoices of an accounting software. You can borrow up to $100,000.
- PayPal Working Capital – if you are a PayPal business customer, this loan can be right for you. To be eligible for this loan, you have to have at least $20,000 in PayPal sales and over 3 months in PayPal history. You can borrow up to $85,000 for as long as it takes for you to repay the loan.
- Behalf – if you have a working business and need to purchase small goods and services. To apply for it, you need to have a registered US business with a bank account and SSN. You can borrow up to $50,000 up to 6 months.
Lots of financial analysts suggest that if you are starting out, you should consider taking a secured business loan first. Of course, the risk of losing your house or even your car is worrisome. Since you are not required to cover the value of loan when taking an unsecured business loan, you are at an advantage.
In the end, to succeed you need to be willing to sacrifice a lot, at least in the start-up phase of your business.