What is an Unsecured Business Loan?
An unsecured business loan is a funding solution which requires no personal or business asset as collateral. However, these loans require the borrower to show the lender a good credit rating, with excellent financial history and cash flow forecast. The finance house takes more of the risk involved in granting the loan and therefore, demands a higher interest rate.
The lender is aware that the borrower might default and not be able to repay the loan and it is this risk which attracts the large repayment amortization than on a secured business loan.
The borrower must show through detailed cash flow analysis, that a regular monthly payment including interest is possible during the loan period. The loan period is usually shorter than a collateral based or secured loan; the amount of interest charged depends on the borrowing period.
Examples of Unsecured Loans
Although the interest rates are higher for an unsecured loan than a secured loan, they can still be lower than other funding solutions. For example, a revolving credit loan, such as a credit card, personal or student loan. These lines of credit are unsecured and involve a continual borrowing and payment plan, attracting a high rate of interest.
Unsecured Term Loans, by contrast to the revolving credit, mean that the borrower repays the loan in equal installments until the end of the loan term when the loan is fully paid off. This type of loan can be used by a business to consolidate debt repayment.
Alternative lenders for unsecured loans, such as merchant cash advance, and payday lenders charge the highest rates for their unsecured loans. These lending companies often make the borrower take bigger risks by agreeing to automatic withdrawal from a current account. The result is a never-ending cycle of borrowing and excessive repayment charges.
With a secured loan, repossession of collateral helps the lender recoup the losses if there is payment default.
However, with an unsecured business loan, unless there has been a personal guarantee made by a company director or owner, there is little to be done in the way of recoupment. Often the lender will resort to debt collection, and in dire circumstances, the borrower will be placed in a tenuous position and probably have to apply for bankruptcy.
1. Strenuous credit checks by the lender on the borrower’s financial status.
2. Companies with limited assets of one that does not wish to provide a form of collateral will be able to apply for an unsecured business loan.
3. In some situations, dependent on meeting the credit rating criteria, directors and company owners, will have to sign personal guarantees.
Pros and Cons of Unsecured Business Loans
- No risk to existing assets like a home, vehicles, other commercial property, or long-term assets
- Because the borrower doesn’t need to document their assets in an unsecured business loan, some parts of the loan underwriting process may be easier
- The interest rates will normally be higher than for secured loans
- For those without squeaky clean credit, unsecured business loans can have a particularly high debt load
Unsecured Business Loan FAQs
What are the minimum requirements to apply for an unsecured business loan?
To secure an unsecured business loan, the applicant should be 21 years and above, should have a basic minimum salary, and a decent turnover, along with a good credit history.
What is the interest rate on an unsecured business loan?
The rate of interest can be as low as 14%, and can go on increasing as per the requirements.
How much can I borrow?
The amount you can borrow depends upon a couple of factors, like your profits, how well established your business is, your credit scores, and others. You can borrow as high as $500,000 if you have a good financial history.
How long do I wait for funding after being approved?
Unsecured business loans can be really quick and reasonable. Your loan can be funded in a couple of weeks. Sometimes, it’s just about a few days.
Can I repay back early?
Yes, of course, you can. In some cases, where there are no prepayment charges, you might end up saving a few bucks.
How will I know if I’ve been approved/declined?
In either case, it will be communicated to you. The lender would send you a proper reason for the same through your mentioned mode of communication.
What is the term of the loan?
The tenure of the loan is flexible, ranging from 1-5 years.
What documentation will you need to process my loan application?
The documents required for loan application are as follows:
- Age and Identity Proof
- Proof of income and Business- For example, you can show salary slips, bank statements, etc.
- Proof of residence
- Duly signed application form.
Why not go direct, for an unsecured business loan?
There is absolutely no trouble if you opt for going to the lender directly, however, the third parties make the process incredibly fast and easy.
Is an unsecured loan safe?
Unsecured Business Loans are quite famous among businesses across the world. All you must pay attention to is, the ‘terms and conditions’ involved. Since you do not need any collateral as such, the rate of interest typically rises.
What happens if I can’t pay the unsecured loan?
If you fail to pay the loan on time, it would have a poor impact on your credit score. You can be debarred from availing loans in the future. In the worst-case scenario, the lender may even take legal actions against you, to cope with the loss.
What are the advantages of an unsecured business loan?
- It’s not leveraged by any collateral/assets/security deposit.
- It can be availed by any large scale or even small scale manufacturers, SME, service providers, etc.
- Minimum documentation required
- It is fast and easy
How does an unsecured business loan affect credit score?
The inability to repay the loan on loan on time can affect your credit score negatively. Likewise, if you pay it hassle-free, and on time, your credit score can improve.
Can I get unsecured business credit without collateral?
Yes, you can.
Can I get unsecured business credit without a personal guarantee?
It is not mandatory to have a personal guarantee for an unsecured business loan. Without a personal guarantee also, you can get the loan approved. The main factor is that your business should be functional.
Can I get unsecured business credit with bad credit?
There is no doubt that it is much easier to avail unsecured loans with good credits. However, there are alternative lenders as well, which provide loans to customers with bad credit. So yes, you can avail unsecured business loans with bad credit.
How can an unsecured loan help in business?
- It can be used for purchasing inventories
- It can be used to improve the infrastructure
- It can be used to hire more staff members, etc.
What are the key features of the unsecured business loan?
- They are quick and easy, without requiring any collateral
- It offers the facility of easy documentation
- These loans are given based on your financial history, the better your score, the higher the loan amount you can get!
What are the loan tenure options available?
The loan tenure can be 1 year to 5 years.
What is the minimum and maximum loan amount which can be availed under unsecured business loan?
In general, the amount ranges from as low as $500 to as high as $500,000.
We are a start-up firm, can we avail of this loan?
Since unsecured business loans look for financial history or current business status, it is difficult to get one for a start-up firm. However, multiple unsecured business loans are coming up for the start-up as well.
Can I part pay or prepay the loan?
Different lenders have varied policies related to repaying the loan. Mostly it is allowed only after a prescribed amount of time.
What should be the borrower’s age to apply for an unsecured business loan?
The borrower should be 21 years and above in most cases.
Are unsecured business loans expensive?
The unsecured business loans are not backed by any assets, collateral, or personal guarantee. Henceforth, the rate of interest is naturally a bit tight. However, this trend is changing and more organizations are coming up, which consider the financial condition as the prime factor.