Pros and Cons of Unsecured Business Loans

For years, obtaining a loan from a major bank was your only option.

However, while that wasn’t such a problem before, over the past several decades, banks have become much more strict about who they lend to.

Now, most banks require at least:

  • 2 years in business
  • Good personal credit
  • Positive cash flow and profit on your tax return
  • And, even then, collateral such as your business property

The problem is, most businesses under 2 years show a loss and you may or may not have good credit. In addition, putting down collateral such as your property or personal assets is a big risk that no one wants to take.

So, what are your options?

Fortunately, over the past several decades, non-bank (or “alternative”) lending has exploded. And, with it, several useful options for businesses that otherwise might not be able to get approved with a traditional lender such as a bank.

That’s where unsecured business loans come in.

With an unsecured business loan from an alternative lender, you can get anywhere from $10,000 to $2,000,000 (based on your cash flow and revenue) and fast, often in as little as 24-48 hours depending on the lender.

Plus, you can use an unsecured business loan for whatever you need, including:

  • Purchasing supplies
  • Buying new equipment
  • Making new hires
  • Adding additional locations
  • Pumping cash into the business
  • Paying accounts payable
  • Paying taxes or other obligations
  • Marketing and advertising
  • Or payroll

In addition, an unsecured business loan doesn’t require collateral such as property, cash savings, or personal assets, meaning your risk factor is greatly reduced.

But what are the trade-offs? There is no perfect loan option, so an unsecured business loan is definitely better suited for certain businesses more than it is others.

For that reason, it’s important to know what the pros and cons are of unsecured business loans.

Pros of unsecured business loans

Unsecured have a few downsides, but quite a few upsides. The benefits of unsecured business loans are:

Pro: No collateral required

Easily one of the biggest pros, an unsecured business loan doesn’t require hard collateral.

Traditional secured business loans from banks can be a big gamble because they require collateral in the form of business property, cash savings, equipment, material, and even personal assets such as your home or car.

If you fail to pay and default on your loan, your business could end up crippled from much more than just the lack of cash flow.

However, with an unsecured business loan from a non-bank lender, such collateral isn’t required. You may be required to offer a form of limited collateral, however, it typically comes in the form of future business sales and you’re not required to pay the loan and said collateral if you go out of business.

Pro: Large loan amounts

Unsecured business loans offer very large loan amounts, up to $2,000,000 for some lenders.

If you need a large lump sum for business expansion, an unsecured business loan might be the perfect vehicle for helping you get there.

The only caveat to this is the loan amount is typically based on your gross annual sales in combination with your cash flow. In other words, you need to show lenders that you’ll be able to pay the loan back within a reasonable amount of time.

Pro: Your credit doesn’t have to be stellar

As we touched on earlier, the problem with trying to get a loan from a bank is they require stellar credit. If you don’t have good personal credit– you’re out of luck.

That kind of sucks, right? Fortunately, unsecured business loans from non-bank lenders now offer a way of obtaining the funds your business needs even if your credit isn’t great.

With an unsecured business loan, approval is based on your entire business’ health, not just your credit score.

This is possible for lenders to offer because they use information like debt-service coverage ratio– the difference between your cash flow and debt owed– and other metrics to calculate your ability to pay back a loan.

Pro: Get funding fast

Most alternative lenders offer approval and transfer of funds fast. And we mean fast, often in under 48 hours from submitted application to funds arriving in your account. Each lender is different, however, many lenders offer funds with a very short turnaround.

If your business is hurting for funds now and you need a quick injection of cash, an unsecured business loan could be a good option, especially if your credit isn’t stellar to top it off.

Cons of unsecured business loans

While there are several pros of unsecured business loans, and they’re big ones, there are a few cons that are important to consider before applying as well.

Here are the cons of an unsecured business loan:

Con: Higher interest rates

With an unsecured business loan, interest rates tend to be higher so that lenders can make up for the added risk.

Remember, they’re not taking on any substantial collateral such as property or cash savings (and neither do you have to worry about it), so they need to cover ground somewhere else.

Rates on an unsecured business loan vary depending on your risk factor, however, they can be as low as 14% or much higher if you’re considered high risk.

Con: May require limited collateral

As we talked about earlier, unsecured business loans don’t require hard collateral. However, depending on the lender, you may be required to offer a form of limited collateral.

Don’t worry, though, as limited collateral doesn’t work the same way the hard collateral you’re likely familiar with does.

As opposed to typical collateral like your business property or personal assets, limited collateral typically requires you put down a percentage of your future sales in case you default on your loan. However, if you go out of business you aren’t required to pay the loan back.

Con: Must have been in business for at least 6 months

Clearly, this is an easy hurdle for most businesses to pass through without a hitch, however, if you’re a startup looking to generate funds to get yourself off the ground, an unsecured business loan probably isn’t an option.

That’s because most lenders require that you’ve been in business for at least 6 months and often more than 1 year.

Con: $10,000 or more in monthly sales

Another one of the basic requirements for approval with this type of loan is a minimum amount of monthly sales. Typically, to be approved for an unsecured business loan your business needs to have at least $10,000 (or more) in monthly sales.

That might not sound like much for most business owners, however, it again means that while an unsecured business loan is ideal for many business occasions, it’s not generally a good fit for startups.

Get the funding your business needs

Getting the funding your business needed was once difficult, if not impossible, especially if you had bad credit.

Fortunately, now, there are options available to you that don’t require stellar credit or valuable collateral.

With an unsecured business loan, you can get the cash your business needs for everything from new equipment and materials to hires, training, marketing and everything in between on terms that just make sense for your business.

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