No Assets, No Problem
- Some business owners may not have personal or business assets to offer as collateral
- Get the cash your business needs, even if you don’t have valuable assets
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(877) 386-3035
Questions? Call Us Anytime
(877) 386-3035
Unsecured Business Loans
What is an Unsecured Loans and How Does It Work
A type of business financing where the borrower is not obligated to pledge collateral including real estate, inventory, or equipment is termed as an unsecured business loan. The borrower’s credit worthiness is the only parameter considered to issue the loan. Unsecured business loans are also called personal loans or signature loans.
According to the US Small Business Administration, around 73% of small businesses depend on outside financing. Estimates also suggest that small businesses borrowed $600 million from banks and they get nearly the same amount ($593 million) from private investors and finance companies. Most of these loans are unsecured loans that completely depend on the credit of the borrower and the lender’s faith in them. This kind of lending can be greatly helpful to business owners but there are some dangers associated with exploring beyond the boundaries set by product design. In this article, we break down the working of unsecured loans and explain why they could be great for your business if handled in the right way.
Easier Qualifications
- Unsecured loans from alternative lenders generally offer less stringent credit or financial requirements
- Alternative lenders also have higher approval rates than many traditional lending options
Keep Things Separate
- Avoid mixing personal and business matters
- Keep major personal assets, like your house, safe from the success or shortcomings of your business
Cash When You Need it
- Without collateral, you can take out a loan when you need it most and not worry about losing assets
- Cover the cost of unexpected vendor invoices or repair bills without the risk of draining cash reserves
What Are The Features Of Unsecured Loans?
An unsecured loan allows you to gather capital without having to submit any collateral and can give a major boost to the growth of your business. Whether you want new equipment or want to expand your business, an extra source of capital can make these changes possible with a lot more ease.
- While the borrower is not required to provide collateral to be granted this loan, lenders will usually ask for a personal guarantee from the borrower. This indicates that the lender is awarded the right to seize your personal assets in the event of default.
- Because the lenders do not demand the borrower to pledge collateral, the interest rates will generally be higher than that of secured loans.
- Loan amounts will generally be lower.
- The lenders of unsecured business loans expect the borrower to have excellent credit.
Qualifications for Unsecured Loans
6 Months in
Business
Fico Score Over
575
Equipment Quote
From a Vendor
How to Apply
Securing the funds your business needs in order to continue running smoothly is easy with financing options from Fundrly. Our application process is easy, fast, and secure. In only a couple of minutes, you can apply for a customized loan for your small business.
After you finish applying, one of our loan specialists will contact you so we can learn a little more about you and your business. Your loan specialist will help answer any questions you have about the loan process and help you determine which loan is the right fit for you and your business. Our high approval rates and quick decisions make it easy for you to get back to running your business.
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Why Fundrly
Fundrly offers a personalized approach and will help guide you and answer any questions you may have with our expert loan specialists. Our funding process is made easy in order to get you the money you need quickly to help cover your business expenses.
We Know Your Businesses
We have experience helping a wide range of businesses secure the right financing solution
Trusted by Businesses Like Yours
Over $250 million in funding to more than 25,000 businesses nationwide
Personalized Experience
Financing solutions and payment options tailored to your specific needs
Quick & Easy Application Process
Fill out our quick online application with a decision in as little as 24 hours
High Approval Rates
Even if you’ve been turned down by banks or others, there’s still a great chance for us to get you the business capital you need
Stress-Free Lending
No collateral requirements, with easy, automatic payments
Why is it Difficult to Receive Unsecured Business Loans?
A large percentage of new businesses fail within the first two years. This indicates that lending is a risky business and the lenders are well aware of the potential of default.
To get a better idea of the issue, suppose 10 people came to you asking for $10,000 each as a loan. If you accept their request, you would have loaned $100,000. If you were expected to be paid back only $20,000, which means you will suffer a loss of $80,000, would you still go ahead? No.
Now consider each of these people pledged assets that are at least worth the amount they borrow ($10,000 in this example). Then you would gain the confidence to provide the loan because even if the borrowers default you can satisfy the unpaid loan by selling their collateral.
Small Business Loans from Banks: A Challenge
Post-financial crisis of 2008, banks have imposed strict requirements on business lending. As a result of this, the default rates on small business loans became as low as 2% in 2014. The reason is that business lending decreased dramatically during the period and only the highly-qualified applicants managed to get loans.
The Kauffman Foundation found that about 20% of the credit applicants that were part of the survey said that they weren’t granted credit. When some businesses got credit, they weren’t mostly given the full amount they applied for. According to the Federal Reserve, only 50% of the 82% of small employer firms that applied for financing got the full amount they requested. Moreover, businesses are not often encouraged to apply for additional credit because they expect that the request will be turned down. The Federal Reserve found that 16% of small businesses were discouraged from requesting financing or additional credit. This 16% may include more minority and women-owned businesses rather than businesses owned by men and non-minority.
If you are planning to get business financing for your company, understanding how most of the businesses in the US manage to get it will be useful.
Top Sources of Expansion Capital
The US Census Bureau and the SBA say that only 5% of companies depended on bank loans to expand their capital. Nearly the same percentage of businesses used their personal credit card for funding. It is disappointing to know that 57% of the companies decided against expanding their business because they were either denied credit or did not even apply for it. Business owners mostly depended on their personal savings for funding their businesses.
Fundrly Small Business Lending Index
The Fundrly Small Business Lending Index is a monthly report that keeps track of business lending activity. As per the findings of the Small Business Lending Index, small companies mostly depend on banks for business loans. The report is an analysis of the lending activity of some top lending entities.
Advantages and Disadvantages of Unsecured Business Loans
Below is a list of the advantages and disadvantages of unsecured business loans
Advantages
- Access to cash
- No collateral requirements
Disadvantages
- Higher interest rates
- Personal guarantee
- Lower loan amounts
- Requires excellent credit
Some business owners find unsecured business loans as the only way to expand their business operations and finance. However, unsecured business loans have limitations, and in most cases, they aren’t actually “unsecured” because the lenders demand a personal guarantee.
Similar to merchant cash in advance, unsecured business loans usually have a higher interest rate than other types of loans.
What to Know When Applying For An Unsecured Loan
An unsecured business loan by all means isn’t a reality.
Business owners will probably find the lending landscape quite confusing and it is known without a doubt that there will be bad actors in the lending business. Using common sense, you can avoid getting into debt with extremely high-interest rates and prevent the loss of your business and personal assets.
If you are ever offered an unsecured business loan that seems too good to be true, it will mostly be that way. Evaluate an unsecured loan by using the following methods:
- Find out the total interest rate and annual percentage rate.
- Find out if the loan requires a personal guarantee.
- Read and understand everything written in the fine print.
- Get several offers and check the rates offered by various lenders.
- Look for terms like “Blanket Lien” and “UCC” written in the fine print and understand their implications.
- Check the lender’s reputation.
Speak to a Funding Specialist